What is Driving Commercial Real Estate?
You need to know what’s ahead when you’re behind the wheel. Similarly, commercial real estate investors must understand what drives the commercial property market to prepare for the future.
Plenty of forces drive the commercial real estate market, including political, economic, and psychographic influences. Understanding these key drivers gives investors a clear perspective for the future.
Strong Job Markets
A strong job market attracts people who want well-paying jobs and businesses that need space to support them. This drives demand for commercial real estate, including office properties, industrial, retail shopping malls, multifamily, and healthcare.
Historically, a strong job market drives rents and occupancy higher. This is especially true in the most competitive markets.
Other factors, such as interest rates and inflation, also affect the market. However, Rubin believes these are the least impactful threats to the sector and will only cause slowdowns if a recession hits.
Strong Population Growth
Population growth is not only good for businesses and employees, but it’s also a boon to real estate investors. With newcomers flocking to urban centers and millennials opting for the suburban lifestyle, a growing population can mean an uptick in available commercial properties.
Using demographics to inform real estate decisions can be a game changer for commercial property owners and managers. In particular, analyzing the number of new residents in your market is a great way to determine whether it’s a booming or stagnant area. This is especially important when conducting a market analysis for a new multifamily development or office space. Performing the right research can help you identify new opportunities and avoid costly pitfalls. You can create your most effective business strategy by identifying the most interesting demographic trends in your target market.
Strong Economic Growth
Economic growth is measured in the ‘nominal’ (not real) value of production. This is an important indicator for economists, investors, and the public because it shows that people and businesses earn and spend more money.
A positive growth rate means the economy produces more goods and services, which gives companies more money to spend on employees. That can lead to higher incomes for consumers, leading to more spending and growth.
Various factors, including low-interest rates and easy credit, have driven the strong economy. The commercial real estate industry has suffered. As a result, particularly office and retail properties.
Strong Cap Rates
Cap rates are a critical metric for real estate investors. They reflect property value and net operating income (NOI) over one year, with interest rates an additional contributing factor.
Stronger economic conditions increase demand for commercial real estate, which drives prices and increases cap rates. Conversely, a weaker economy results in less demand and lower prices.
Smart investors often look for properties at a higher cap rate during a stronger economy and sell them when the market is tighter. However, cap rates aren’t a perfect metric for every property type.
The cap rate you choose should be based on your property’s specific prospects and your perspective as an investor. Understanding how cap and interest rates move will help you make smart decisions to reduce risk and maximize investment returns.
Strong Investment Returns
Commercial real estate is an attractive and profitable investment, but it can also be a risky one. It’s important to understand the drivers behind commercial property returns to know how well your investments will likely perform over time.
The returns that come from commercial properties get generated from two sources: rental revenue and price appreciation. It’s important to understand what drives each to achieve higher returns so that you can identify and invest in the best property type for your portfolio.
A strong job market is another driver of commercial property returns. People follow jobs, and companies follow people, which means that if there are more people in a market, more businesses will serve them. This is a positive for the commercial property sector.
