Understanding Commercial Real Estate Markets

Commercial real estate is a booming industry. According to Real Capital Analytics, 2015 saw $533 billion in CRE sales in markets across the United States—up 23 percent from 2014. Newcomers to commercial real estate investing may wonder where these properties are being purchased and how other investors are selecting these markets. The following factors, market data, and future trends are intended to provide a starting point for investors to begin evaluating and understanding commercial real estate markets across the United States.

Commercial Real Estate Market Factors

When comparing properties in different markets, a commercial real estate investor should consider these general factors to see if that property represents a potentially profitable investment opportunity:

  • Employment Rate – Jobs signify a need for commercial real estate space. A low unemployment rate means there are more Americans on the workforce in a particular region, which in turn means more office space is needed in that market.
  • Purchase Price – High property prices are clearly undesirable. Instead, commercial foreclosures and slightly distressed properties that are priced at or below market value allow for greater profit.
  • Rent – A high average asking rent in the area means that tenants will be willing to pay more to rent space on the property.
  • Tenant Demand – For there to be rental income, there must be tenants seeking commercial space to rent. Cities that are developing new residential complexes and producing new jobs are likely to see an increased demand from tenants.
  • Vacancy Rates – Low vacancy rates for commercial spaces within a particular area are desirable, in combination with high tenant demand. This means there is greater demand than supply, which will keep overall rental rates higher.

In summary, the most important factor when evaluating a particular commercial real estate market is supply and demand. Ideal properties will be in markets with low vacancies and limited space available for new developments. In addition, low unemployment in the area will likely mean more tenants, and if there is a limited amount of commercial properties available, higher rent can be charged.

Supply may be affected by new developments within a locale. As such, areas with a high rate of building permits issued over the past years may result in too many buildings within that market in the near future. Investors should refer to data from the U.S. Census Bureau, the Bureau of Labor Statistics, and other such sources for an understanding of a market’s current economic status and outlook.

It is important to note that supply and demand trends are not always in sync across the commercial real estate property sectors. For example, while retail space demand is largely driven by consumer demand, office space demand is more directly influenced by employment levels.

Top Commercial Real Estate Markets

Based on data from Real Capital Analytics, the top five markets for commercial real estate property sales in 2015 in terms of total dollar volume were:

  1. Manhattan – $55.9 billion
  2. Los Angeles -$27.6 billion
  3. Chicago – $22.6 billion
  4. Dallas – $19.5 billion
  5. Atlanta – $16.9 billion

In addition, the top five growth markets for property sales in 2015 in terms of year-over-year percentage increase in sales volume were:

  1. DC/Virginia Suburbs – 121 percent
  2. Baltimore – 71 percent
  3. Orange County, California – 70 percent
  4. Northern New Jersey – 69 percent
  5. Seattle – 68 percent

The leading commercial real estate markets generally represent areas of perceived lowest risk. The growing markets represent may opportunities for growth and capital appreciation.

Future Trends in Commercial Real Estate

On a broader scale, commercial real estate is sensitive to a number of economic undercurrents that may have a ripple effect across regional markets. Such trends include:

  1. Global Urbanization – From 2001-2010, the U.S. urban population grew by 12.1 percent and this urbanization trend is continuing. As more Americans seek better access to amenities and jobs, and suburban communities adopt a more urban format, the demand for retail, offices, and other properties will increase in these areas.
  2. Retail Industry Shifts – With rising interest rates, consumers will be paying more to use their credit cards and they may end up thinking twice before making a purchase. This could put stress on the retail sector. In addition, retail spaces are facing pressure to shift into physical/virtual spaces as technology continues to evolve.
  3. Reduced Oil Prices – Oil prices dropped dramatically in 2015 due to reduced demand and increased production. The effects will vary by market and sector, but may include, for example, a boost in the hotels sector, since consumers will have more disposable income and will be more inclined to travel.i

Whether these and other trends ultimately have the projected impact on commercial real estate markets, investors should remain aware of how shifts in the economy may affect their prospective property investment.




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