Buying or investing in commercial real estate, even in a thriving city like Miami, comes with inherent risks. A bustling area of the city could turn into a ghost town in a matter of a few years.
While no one can predict the future with certainty, with thorough research and other due diligence, you improve your chances of making a sound investment rather than being stuck with a property that sits empty because there’s no market for it.
One mistake that too many people make is not recognizing the signs of potential “functional obsolescence.” While that term is often used when referring to tech, like a phone or computer that needs to be replaced every few years to take advantage of the latest available features, it can also apply to real estate.
It’s been defined as “the impairment of functional capacity of a property according to market tastes and standards.” There are different types of real estate functional obsolescence. You can’t avoid it completely, but you need to know what which type(s) may apply so that you can make your decision to invest or buy and at what price wisely.
External obsolescence
This is a condition (current or planned) separate from but close enough to it that will affect its value and over which you likely have no control property. A nearby airport or prison, for example, could lower the property value. So could planned zoning changes that would restrict the kind of business that can be done on a property. It’s wise to do a thorough search of public records to see what, if anything, is planned for the area.
Curable vs incurable obsolescence
Both of these are conditions on the property. Some can be “cured” (fixed). This could be anything from asbestos to noncompliance with Americans with Disabilities Act (ADA) standards. It would be necessary to determine whether it’s a better financial decision to buy the property and fix these things or pass on it.
An “incurable” situation would be one that can’t be changed – at least without gutting the property and rebuilding. For example, a building may be in an old architectural style that makes it look out of place in the area.
Being knowledgeable about things like functional obsolescence is just one reason why it’s crucial to have sound real estate, financial and legal guidance when putting money into commercial real estate.
