Deciding where to invest and locate a business can be a make or break decision. In large part it can determine the number of people who find your business, what their economic status is, and even how much the rent costs. Central business districts can be a wonderful location to maximize exposure but do come with some important considerations. Find out if investing in a central business district is right for your real estate business before making the move.
What is a central business district?
A central business district (CBD) is a term used to define the downtown area, city center, or financial district of a large metropolitan area that serves as the hub for business, culture, and transportation of the city. Commercial enterprises dominate CBDs and primarily include office space, retail, hotel, financial, medical and government buildings, and high-density urban housing.
A central business district is the densely populated area of the city and makes up a significant portion of the city's skyline with tall skyscraper buildings and historic buildings. In many cases, it is in the oldest part of a city because that's where the center of commerce originated from and thus the highest concentration of residents and buildings reside. It's fairly common for CBDs to operate nearly 24 hours a day with service-type businesses operating during the day and restaurant or entertainment type businesses taking over at night. A few of the largest CBDs in the United States include the loop in Chicago, Midtown and Manhattan in New York, and Canal Street located in the French Quarter of New Orleans.
Why investors may want to invest in a central business district
Investing in a CBD can be a worthwhile investment for many businesses. Property taxes are often higher in these areas, but prime locations charge higher rental rates. Let's take a look at the top five reasons to invest in a CBD.
1. Location, location, location
The age-old adage in real estate, "location, location, location", couldn't ring truer here. Having a business in a prime location like a CBD means increased foot traffic and higher demand by tenants and business owners because of it. Investors who purchase property in a CBD may pay more for the real estate, but higher rental rates often compensate for the initial investment.
2. Wealthy residents and clients
Prime real estate locations near shopping, businesses, and entertainment hubs often attract higher-income residents and customers. Businesses that can support the high costs in rent and salaries initially will be able to access a large pool of prosperous residents and clients and reduce risk exposure in market downturns because of the quality of the tenants.
3. Established framework
Quality buildings that are designed to meet business needs make finding a suitable location much easier than in other areas of the city. With the close proximity to other businesses and services, your property will be visible to tenants who want convenient access to amenities and essential services for living and working.
4. Easy access
Adequate transportation networks are almost always associated with a central business district. Depending on the city and the location of the CBD, that may mean close proximity to the airport, interstate, public transportation network, or a residential area for pedestrian walkers or bikers. It gives visiting clients, people from outside the area, tenants, and employees efficient access to your business. Traffic congestion is a standard issue and parking can be limited in a CBD, so investing in a building that offers both can be a great extra revenue stream.
5. Well maintained
CBDs often have some of the highest real estate values in the city. And when land values are high, so are the taxes. But high taxes help to fund maintenance to the area. A city government is not going to allow one of their most lucrative tax bases to fall into disrepair, so revitalization dollars are regularly funneled into the CBD and new developments are frequently made by real estate investment trusts (REITs) and other large commercial real estate investors. That means sparkling buildings, clean streets, and minimal vacancies in a balanced or strong market.
The downside to investing in CBDs
High property taxes and inflated real estate values are two of the main downfalls to investing in a central business district, but there are other things to be aware of as well. Market downturns can adversely affect CBDs in particular. Right now, many top-tier, high-density CBDs are seeing an influx of tenants fleeing the city in search for lower rents and more space. This has driven rental prices down at rapid rates. High competition, particularly with REITs who may have access to cheaper capital, means you may not be able to beat the prices they can pay for real estate while achieving your desired return. Investing in a CBD can be a lucrative move for your business as long as the property or planned development has the proven income to support the high operating expenses and purchase cost.