When deciding whether to invest in a commercial property — or even deciding what to do with the property you already own — you always want to have as much information as possible and make sure you’ve analyzed the deal from all angles. A SWOT analysis will help you build your strategy and create an action plan.
What Is a SWOT Analysis?
In commercial real estate, investors and brokers will often conduct a SWOT analysis to make business and investment decisions. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.
Analyzing these four aspects of a deal allows investors to make an informed decision and come up with a viable business plan or strategies for improvement. Essentially, a SWOT analysis is a planning technique used to figure out the competitive position of a company and identify future goals and potential.
Strengths describe the ways in which a business, deal, or organization excels. Some internal factors to focus on are:
- market knowledge
- real estate expertise
- sphere of influence
- strong balance sheet
- loyal customer base
- the current stage of the real estate cycle
These strengths could attract new investors and show the potential of an investment deal.
On the other hand, weaknesses will identify all the ways a deal, agent or organization can fall short. Keep these questions in mind:
- What is stopping this business from performing at the optimal level?
- Where does the business need to improve?
- Are there any debts to be paid off?
- Is there a lack of capital?
- Are the people running the business or leading the investment inexperienced?
- Are the costs too high to manage?
- Is there a competitor who could undermine potential profits?
All of these questions are important to consider in strategic planning.
The opportunities section in SWOT lists any potential for growth or profit, or any external factors that could prove advantageous. For instance, Will Kenton of Investopedia wrote, “If a country cuts tariffs, a car manufacturer can export its cars into a new market, increasing sales and market share.”
With commercial real estate, some examples of opportunities include:
- new residents moving to the area
- new commercial or industrial centers
- new businesses opening up
- transportation growth
- housing market growth
Opportunities may also include internal factors like underutilized strengths. If a member of your firm has niche knowledge, now is the time to consider incorporating that knowledge into your strategy.
Finally, it’s important to identify any potential threats to a business or real estate investment. Is anything occurring in the near future to put your business at risk? Some examples are:
- economic downturn
- rising interest rates
- rising costs for materials
- more competitors
- market shifts
- long development timeline
When Should You Use a SWOT Analysis in Commercial Real Estate?
Generally, brokers conduct a SWOT analysis to provide information to property owners.
“I would say that we don’t formally use [SWOT analyses],” said Jake Ammon, Vice President of Addison Commercial Real Estate. However, Ammon said that they do provide feedback to owners in an “informal” SWOT, which includes the strengths, weaknesses, opportunities and threats of a real estate deal, especially if the deal is more complex.
“If it’s an easy sale, we don’t have to do much in depth feedback or analysis,” Ammon admitted. “I would say that [a SWOT analysis] comes into play whenever [the deal] is going to be perceived as a challenge.”
So, the more complex the deal, the more beneficial an analysis would be.
How to Conduct a SWOT Analysis
First, you want to compile as much data as possible about your business investment, and any external factors that could affect that investment. Sometimes it’s good to get the help of a broker, as brokers will know exactly what factors to take into account. There are also independent SWOT analysts that could help identify where a business’s strengths and weaknesses lie.
You can start with just a bulleted list of the strengths, weaknesses, opportunities and threats, or you can arrange them into some kind of SWOT diagram, depending on your personal preference. Just make sure you organize each element of a SWOT analysis in a way that allows you to visualize and understand each category’s effect on your business.
One idea is to create a list of questions to answer for each category. This list will serve as a SWOT template. Some possible questions include:
- What is the market like right now?
- Are there predicted market changes coming up?
- What demographics are we not targeting enough?
- Are there any competitors in the area?
- Is the population growing?
- Will the property appreciate over time?
- What demographics are we targeting, and can we attract that group?
- What is our strongest asset?
- Are there any regulations that could affect our business?
This list is by no means fully comprehensive, and the questions you ask will vary depending on the type of property. However, the above list is a good place to start when conducting your analysis.
An Example of a Real Estate SWOT Analysis
As mentioned earlier, a SWOT analysis usually comes into play when the commercial real estate deal is more of a challenge, where a higher amount of strategic planning is necessary.
“For a church facility we had,” Ammon said, “we went through [a SWOT analysis], from the strengths, weaknesses, opportunities, and threats, and then our assessment as to what to do about marketing.”
In the case of a commercial property like a church facility, Ammon said it was a “unique sale,” which required going through the steps of a SWOT.
For the church, Ammon’s company created their analysis for the sale to determine where to focus their market efforts.
Next Steps: How to Put Your SWOT Analysis into Action
Once your analysis is complete, it’s now up to you to make a strategy for your business. Taking a look at the data, does the investment seem profitable? Are there changes to make in the plan? Are there enough strengths and opportunities to offset the weaknesses and threats? How can you market this opportunity?
These are important questions to ask yourself after conducting a SWOT analysis. Essentially, the SWOT analysis provides all the information necessary to make an informed decision about your commercial real estate property.
“The nice thing about commercial real estate,” Ammon said, “is that even though something has a weakness, it could still be a good opportunity.”
Limitations of SWOT Analyses and Alternatives
In terms of limitations, sometimes a SWOT analysis isn’t necessary, especially in a standard, uncomplicated commercial real estate deal.
One alternative Ammon mentioned was simply an assessment of “all the different possible uses” for a piece of land.
“For some buildings, the land is more valuable as land than it is as a building, depending on what it is,” Amon explained. “So that’s where I wouldn’t quite call it a SWOT analysis, but it’s the same idea, and I would say it’s the alternative.”
Other analyses to consider are a PEST analysis, qualitative analysis, quantitative analysis or even a simple costs and benefits analysis, in which you assess positive and negative factors..
A SWOT Analysis Helps You Make Informed Decisions
While a SWOT analysis isn’t always necessary, depending on the type of commercial real estate property and deal, it is very beneficial when it comes to more unique or complicated situations. Having an outline of all the strengths, weaknesses, opportunities and threats will ensure you can make the most informed decisions possible about your real estate investment.