As you may know, success in commercial real estate requires careful study of the fundamentals. Especially in today’s volatile markets, where “scary dips” and “rapid climbs” dominate the news cycle, the diligent investor must side step the drama and stay focused on his goals. Fundamentals such as housing supply, wage growth, vacancy, and rental rates provide information to help you make clear and purposeful investment choices. In this article, we apply these fundamentals across popular real estate assets. So that you can see for yourself how these fundamentals play key roles in predicting market demand.
Multi-family properties were one of the first asset classes to start performing well after the 2008 financial crisis. And today, this high-performer continues to rise with the tide. One reason for its stellar returns is record-low vacancy. That’s the fundamental I’ll focus on here. Vacancy rates provide investors a predictable method to measure risk. Namely, the likelihood of renting a multifamily unit in a given area. Up until a year ago, vacancy rates were the lowest since the mid-80s. These spectacularly low rates – hovering around the low 4% range – drove the demand for multifamily way up. Today, we’ve got levels of multi-family units under construction we haven’t seen since the mid-70s. The demand is still there, but now you have supply coming in to meet it head on. While this is stabilizing vacancy rates, it has done little to slow the growth in rents and NOIs. That’s why multifamily continues to be a great addition to any real estate portfolio. Especially when purchased in areas of high population growth.
You can’t talk about office properties without mentioning employment growth. This fundamental has been a leading driver in many of the 18-hour cities we’ve discussed in previous articles. Afterall, people go where the jobs are. U.S. employment growth has been strong since about 2014. And that’s good for office demand. But an unexpected response to this demand is space utilization. Instead of entire office buildings going up, we’ve seen increased efficiency in available spaces. This is often referred to as hoteling. The hoteling office model is where employees schedule their use of workspaces (including desks, cubicles, equipment, and conference rooms) before they arrive at the office and only on an as-needed basis.According to Global Workplace Analytics, 90% of the U.S. workforce says they would like to work from home – at least part time. So it’s no wonder real estate has evolved to meet this demand. While this trend has been met with some push and pull, forward-thinking organizations are adapting to attract top talent and retain employees.As an investor, keeping up with employment is one thing. But digging deeper to understand how this employment growth can shift the modern workplace is much more interesting.
We’ve had guests on the podcast discuss the future of retail. And it seems there’s a seismic shift taking place with the rise of eCommerce giants like Amazon. To give you an idea of the eCommerce force, consider the second quarter data that shows 9.6% of all retail sales came through eCommerce. That’s up from about 8.8% a year earlier. At the same time, you still have more than 90% of retail sales going through bricks and mortar. So you can’t discount the power of physical presence just yet. Even Amazon seems to think so – having recently announced the opening of more of their own bricks and mortar stores.Keep an eye out for companies like this – those that combine an online presence with a physical space. Especially with the rise of IOT technology, where sensors, apps, and mobile devices work in tandem to provide shoppers with immersive experiences. Because at the end of the day, population concentrations exist in attractive areas. And people get enjoyment from physical spaces that keep them entertained. Just because retail is changing, doesn’t mean it won’t evolve into something more exciting.
Recently, the industrial asset class has been a darling for investors and lenders. Companies looking to capture the last mile of the supply chain are utilizing industrial warehouses to store their products. As a result, we’ve seen lots of demand, lots of absorption, and some changes in the types of industrial spaces available. This includes changes in construction techniques. You might see second floors get added, layouts change, or complete interior makeovers. It all depends on the property type and the individual market. As an investor, now is the time to explore different industrial property types and consider what their future might hold. An industrial space in an area that is gentrifying might turn into the next crossfit gym, craft beer hall, or farmer’s market. The possibilities are endless. But it all stems from a new trend among younger demographics. People want great experiences. And are willing to pay for it. More and more local residents demand these experiences from large, unused spaces. So don’t be surprised to see industrial turn into something you’ve never expect. **********You might be wondering how long the commercial real estate boom will last? In some ways, this comes down to expectations. While the commercial real estate market has had all tailwinds coming out of the recession, it’s important to remember it’s still picking up lost ground. While the tailwinds continue, there have been some headwinds as well. Whether that be the recent rise in interest rates, a slowdown in property price appreciation, or cap rates not compressing the way they have. Stability in commercial real estate metrics has begun. One of the best ways to combat changing markets and sensationalized headlines is by sticking to the fundamentals. Your goal should be to identify what fundamentals are key for you, write them down, and stick to them.*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*