Commercial real estate market. What to observe and how to analyze

Investment in real estate is one of the most obvious decisions, even for those who are starting to think about investing for the first time. However, despite its popularity and long history, everything is not as simple as it might seem at first glance. In this article, we will look at just some of the aspects that we should pay attention to when making investment decisions.

Commercial real estate contains many different options. The most common: apartment buildings; office, retail, industrial, hotel facilities and sections.

Transactions in each of these types of real estate can take place in the primary, secondary or tertiary market.

One way to simplify the decision-making process is to understand how real estate professionals analyze a commercial real estate transaction. There are certain factors that an industry expert will always pay attention to, both at the micro and at the macro level.

Characterization of the market

Overall market trends

At the highest level, the investor needs to understand where we are in the market cycle.

Market cycles usually last plus or minus ten years. Investing at the peak of the market is risky, but the peak of the market is usually discovered after the event, it is extremely difficult to determine it in advance. If someone manages to predict the future, then this is rather luck.

Therefore, it is important to use other markers as a guide when making investment decisions.

Local trends

Useful information in the analysis of a transaction with commercial real estate is provided by the study of trends in the hyperlocal (at the level of a city, region, locality) market. Here are key questions to help you understand them.

Demography

Is the population growing or shrinking? If it grows, then who moves here and why? The age composition of the inhabitants - how diverse is it, is the population aging, how many young people?

This will tell you if you should consider renting to young professionals, families, or residents without children. An area dominated by families, for example, will generate demand for larger apartments. On the other hand, young people, people without children may be more interested in small apartments, but in buildings with more amenities.

It is also important to understand the division between homeowners and tenants. For example, in the United States, on average, 65% of the population are homeowners and 35% renters. But in some markets, there is also a reverse division: the demand for rental housing is higher than the possibility of ownership. This is especially true in urban areas and areas near colleges and universities where the population is more variable.

Economy

What are the main economic drivers of the region? Major employers? How diverse is the local economy? What is the unemployment rate, is it rising or falling?

Taking into account local economic factors, there are two key factors to consider: is the local economy growing or shrinking, and is there industry employer diversification?

If the area is overly dependent on one industry or employer, in the event of its weakening, and even bankruptcy, other areas will collapse, first of all, real estate.

Areas with high employment tend to be "safer" places to invest than areas with persistently high unemployment. Salary is also important. As a rule of thumb, tenants must spend no more than 30% of their household income on rent each month.

Characteristics of the property

Following the market overview, it is necessary to investigate issues related to the property in question:

• What is the average vacancy rate for this type of property?
• How long is under development for new construction of this type of property?
• Which buildings will be considered your biggest competitors?
• What will drive demand for this type of property and why?

The answers to these questions will help you understand whether investing in this type of property in this market is a wise decision.

For example, a region with a growing and diverse population attracted by an expanding technology economy could be a prime candidate for new apartment buildings, especially if your analysis indicates that the existing supply is limited and will be scarce in the next 3-5 years.

Deciding whether a commercial real estate deal is right for you depends on many factors. It is important to remember the main rule - the higher the yield, the greater the risk.