15 Risks Inherent in Commercial Real Estate Investment
There are 15 risks inherent in CRE investment as follows:
- Cash Flow Risk-volatility in the property’s net operating income or cash flow.
- Property Value Risk-a reduction in a property’s value.
- Tenant Risk-loss or bankruptcy of a major tenant.
- Market Risk-negative changes in the local real estate market or metropolitan statistical area.
- Economic Risk-negative changes in the macroeconomy.
- Interest Rate Risk-an increase in interest rates.
- Inflation Risk/An increase in inflation.
- Leasing Risk-inability to lease vacant space or a drop in lease rates.
- Management Risk-poor management policy and operations.
- Ownership Risk-loss of critical personnel of owner or sponsor.
- Legal, Title, Tax and Political Risk-averse legal, tax and political issues and claims on title.
- Construction Risk-development delays, cessation of construction, financial distress of general contractor or sub-contractors and payment defaults.
- Entitlement Risk-inability or delay in obtaining project entitlements.
- Liquidity Risk-inability to sell the property or convert equity value into cash.
- Refinancing Risk-inability to refinance the property.
All investors that own CRE should perform a detailed and systematic review of the above risks and their potential effect on an asset or portfolio.
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Source: Globest.com By Joseph J. Ori | December 02, 2019, at 06:08 AM