Similar to Sublime in 1996, "[We] ain't got no crystal ball".
BUT when it comes to real estate investing, there are three guiding principles that can act as your crystal ball on prospective commercial property performance.
Let's take a look at the key factors driving commercial real estate value and influencing the broader housing market.
What are the key factors driving commercial real estate value?
Market drivers act as forces positively influencing industry trends. They are crucial when monitoring property cycles and are often used by investors looking to find their next venture.
Here are the three primary market drivers for commercial real estate:
#1 - Yields
There is more that meets the eye with real estate investing. Rather than waiting for a big payoff at property sale time, most investors want to generate income from their investment up until then. Said income is called yield.
The higher annual return, not including capital growth, is why commercial property investing is popular for those looking to maximize cash flow. The higher yield is because businesses will pay more per sq. ft. to rent a premises than the average residential tenant will pay for an apartment / house.
Yields have the added benefit of being a key indicator on how the overall market is performing. When yields go down, property values generally go up.
#2 - Business Confidence
Another good indicator of commercial property market health is business confidence.
Chamber of Commerce may conduct surveys with local businesses on how they think the economy will perform in the next 12 months based on what they've seen from their front line interactions / experience. If those business owners are confident the economy will perform well in the coming year, it's likely because they are seeing improved performance in their own operations: steady foot traffic (in the retail sector), uptick in incoming work and demand for their services (in the industrial sector), and good returns on their own investments.
Higher business confidence means more businesses will look for commercial space. Higher demand for commercial space creates higher property value and therefore, higher property price.
#3 - Occupancy Rates
*trigger warning*
There is one fear so great, it can be to blame for most real estate investors' sleepless nights. Most won't even utter the word.
… VACANCY.
Luckily, the word with which will not be named again, can be avoided if managed correctly.
Low occupancy rates mean there is either low demand for businesses looking for new commercial space or the supply of new developments and properties is high. Or a nasty combination of both. High occupancy rates mean there are not enough nearby leasing options for new tenants. Owning a property with a high occupancy rate means it is likely your property is sought-after, with tenants that have few options for relocation, reducing risk of the v-word.
A property is only as good as its tenants. So make sure yours is filled. And with the best.
Though a solid guiding light, past performance cannot predict future returns. Only an understanding of the key factors driving commercial real estate value, an understanding of the underwriting process, and a trusted financing team can help you do that. So talk to one of Security Bank's experienced lenders today.
