We all want to invest in excellent commercial real estate deals, but how can we ensure our investment capital is being funneled into the best commercial real estate markets around? What signals can we look for to lead us in the right direction?
As real estate investors, our goal is to take advantage of market trends in addition to a wide array of other factors so we can invest with confidence.
Let's take a closer look at some of the best indicators and strategies to identify ideal commercial real estate markets with growth potential.
Research Population Growth
While population growth may seem an obvious factor to consider, you'd be surprised how many people don't consider this metric first. If the market's population is growing, the demand for housing will increase and strengthen the real estate market over time.
Researching population growth estimates through previous years is helpful. However, it isn't always the best indicator. A better way would be to look at the market affordability for the tenants. Explore existing home sales metrics. These metrics will illuminate sales trends around the country and provide insight into the health of the various real estate markets and the demand for housing in each region.
An increase in sales can indicate an emerging real estate market. Single-family home sale metrics, however, tend to group multiple cities and areas together, so it's critical to dig deeper into your potential market to stay informed.
Rising rates in rental property is something to keep an eye on if you discover rent price appreciation that is steadily climbing every year. This is one of the most important factors, as it's generally a sign of healthy housing demand and a good indicator for real estate investors.
Research the New Residential Construction Index at the Census Bureau
The New Residential Construction Index consists of two different surveys - building permits and construction.
The building permit survey lists the number of building permits that were issued for new construction on single-family housing properties every month.
The construction survey indicates how many homes have started new construction and how many are completed each month.
Both surveys are indicators of the area's potential real estate pricing. These indicators take into account the property type, any unique characteristics, construction costs, and other factors that might lead to increased real estate prices.
Another key number to look for is how much developed land there is, along with rising building permit trends. This can mean that new construction is outpacing the current population growth. If that's the case, the real estate market can suffer with too many empty units and not enough tenants causing rental rates to go down.
Research Foreclosure Statistics
Another metric to dive into is foreclosure rates. These are solid indicators for evaluating the overall health of the real estate market.
If statistics show an increased foreclosure rate, this could be a sign that the local economy is not doing well, meaning tenants may be struggling financially. Pay attention to the news for insight on real estate trends in suburban markets.
Look for announcements about new deals from larger companies, as these can provide valuable insight into economic factors in the commercial real estate market.
Announcements of job growth in major cities in connection with big companies can mean acquiring new retail space or possibly new construction of offices or even an expanded headquarters. These investments in the commercial real estate industry will produce an influx of new renters needing housing.
Big announcements from major corporations fuel the commercial real estate market, and the anticipation of economic growth can make the real estate market skyrocket.
Take An Interest in the Supply and Rate of Sales
When assessing potential price growth, one area that is frequently overlooked is how quickly real estate inventory is selling. Economists generally suggest that a five to six-month supply indicates a balanced real estate market.
If there is significantly more housing and office space available in the real estate sector, there tends to be lower costs in rental property and home prices.
On the other side, when there is significantly less real estate available of any property type, the property value and the local real estate industry tend to skyrocket.
It's important to note how long properties have been on the market before they sell. For example, if properties sell within 30 days routinely, this could indicate that the market is heating up.
Real estate investment opportunities can be lucrative on either side of the market. It's a matter of commercial investors doing extensive due diligence to find the right investment opportunity.
Compare Median Income Growth To Housing Costs
One typically overlooked area to be aware of is tenant affordability. In other words, can the average family, making an average income afford your value-add rental property?
Balancing the intrinsic value of your commercial real estate and the average income of the local population is a delicate line. Your property's asset class may be too expensive for the local population, therefore leaving you with too many vacant units.
What Research can you do as a Limited Partner Investor?
You've decided you want to start investing in commercial real estate syndications. So, what can you do, as an individual, if you're exploring and vetting investment opportunities in the best real estate markets?
CBRE is a helpful resource for checking yearly and quarterly reports on real estate markets in various asset classes across the US. They have an entire sector of their business model dedicated to performing and providing real estate market research.
Utilizing Google, and websites such as apartments.com can also provide ballpark figures for the average rent pricing in a particular area. Along with these, there are sites that can provide sales reports for a fee.
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This work by Annie Dickerson is licensed under CC BY-NC-SA 4.0