Facing investment dilemma? Unsure about which property to go after or if it’s a good fit for your portfolio? Perhaps it’s time to bring in the SWOT analysis team. SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. It’s an analysis that can be used in a variety of situations from starting a business to starting a long-term project. In this case we’ll look at the SWOT analysis and examples as it relates specifically to commercial real estate.
Strengths. Often this is the easiest of the four to identify simply because if there weren’t strengths in the property, you probably wouldn’t be taking the time to analyze it. Strengths can include items that are specific to the property from amenities to returns on capital. This doesn’t necessarily need to be an exhaustive list of items, but should include major bullet points that would likely be in a marketing flyer. Examples of strengths could include above average returns on investment, long-term staggered leases, close proximity to major traffic arteries, or even a brand new roof.
Weaknesses. Converse to the strengths, this can sometimes be the hardest to identify, yet it’s important to be truthful in this analysis so that you go into the investment with eyes wide open. Sometimes brokers can also downplay weaknesses because they want to get a deal done. What they don’t realize is that identifying weaknesses up front can often help move a deal along. Many times fear of the unknown is what holds investors back from pulling the trigger. Weaknesses can include weak demand for space, poor truck staging, limited power, or deferred maintenance. This is perhaps the most important of the four elements, so make sure to think carefully about potential pitfalls ahead.
Opportunities. This section reflects on opportunities that are either in the present or the future. Items in this portion can include proposed developments that are adjacent to the property that might drive traffic to your site. Or it could be pending zoning changes that could allow the property to be transformed into a higher and better use. Opportunities here could also reflect the potential for increasing rents in the future so that the overall IRR on the investment is higher than anticipated.
Threats. Like opportunities, these could be present now or in the future. Threats could also include items such as changes in zoning, pending changes in tax code, or even natural disasters, such as rising sea levels. This item is also very difficult to predict since you can never identify all threats that could be present. However it is important to do your due diligence, such as check with the local planning department on any potential changes to the city’s master plan. You may find a threat…or an opportunity!
SWOT analysis is an important step to identifying potential hazards or realizing potential opportunities. More importantly, however, it’s a chance to truly understand a property and go into the deal with a better appreciation of what you’re getting yourself into.