4 Factors to Consider
Financial metrics like cap rate, internal rate of return and other criteria play a pivotal role in weighing investment decisions. But, institutional investors tend to prioritize specific markets that promise high returns and ongoing growth in one or several asset classes, driven largely by prior institutional performance and experience. To select regions that warrant strong consideration, investors will perform a commercial real estate market analysis, which can add much-needed color around the prospects of deploying capital in a certain area.
What Is a Market in Commercial Real Estate?
A commercial real estate market is a targeted geographic area in which a firm might invest. In some contexts, markets might also be referred to as metropolitan statistical areas, or MSAs. Commercial real estate markets tend to have high population densities, often spread throughout several communities or sub-markets. Real estate markets are bound by an interdependent economy, typically favoring at least one sector.
Each commercial real estate market represents a distinct opportunity for investors with unique, often intertwined factors to consider. While one investment strategy might favor gateway markets like New York, another might lean specifically toward sunbelt states. Neither is necessarily ideal, but investors with unique experiences may prioritize their efforts based on prior performance.
Comparing Markets With Sub-Markets in Commercial Real Estate
Beyond the general market in which a property resides, investors often also analyze sub-markets within it. Sub-markets offer investors a more granular perception of a property’s location, along with the financial, cultural and other implications. For example, the Downtown Saint George sub-market sits within the broader Greater Saint George/Washington MSA.
Commercial Real Estate Market Analysis: How Are “Good” Markets Defined?
Before jumping into a commercial real estate market analysis feet first, it’s crucial to understand how to measure and assess various markets. No two markets are exactly the same–there are countless macroeconomic and trend-driven factors that could have a material impact. From tourism, to business, lifestyles and hobbies, each market comes with unique characteristics–which directly influence the bottom line.
Many of the representatives I speak with from companies hoping to locate to Southern Utah, as well as other investors, strongly consider the following factors into their decision of making an investment in Southern Utah.
- Popular Asset Classes
Major cities will hold demand across all asset classes, but analyzing commercial real estate markets helps investors to understand which asset classes drive the highest returns. Financial capitals might prove better options for office investors, while tourism hotspots will inevitably hold more opportunities for hospitality-focused groups. Investors often hedge their bets on asset classes that have performed well based on previous experience.
- Local Economic Factors, Businesses & Jobs
On the opposite side of the coin, it’s equally important to understand the industries that thrive, and their impact on the broader CRE market. What local drivers are creating jobs? Is there a certain industry dominating the economy? Understanding the market’s landscape enables investors to make more predictive, forward-looking decisions.
- Analyze Population Growth to Determine the Commercial Real Estate Market’s Potential
Is the population growing or shrinking? Is there a demographic cohort that accounts for a large influx or reduction in new residents? Examining population growth trends—together with the broader forces shaping them–can yield insights about these markets. For the most vivid picture, you should also consider hyper-local trends that might only be prevalent in sub-markets.
- Average Income & Spending Power
Before deploying capital in a new market, you must ensure that tenants can generate revenue to pay rent. If the median salary doesn’t support a new multifamily development, for example, then investing in one might not make sense. Conducting a commercial real estate market analysis can help to understand whether or not local income supports your investment thesis.
Local Factors to Consider During a Commercial Real Estate Market Analysis
Beyond broad market insights, local variables–which are more difficult to generalize and must be considered for each submarket–are also critical. As part of this more granular commercial real estate market analysis, be sure to consider:
- The property’s location: Is it located on the beaten path? If necessary, will tenants generate enough foot traffic to drive their revenue and your returns?
- Proximity to transportation: Will properties that depend on local foot traffic be accessible to residents?
- Sub-market growth: Is the local economy trending upwards and creating economic opportunities?
- Local competitors: Do current properties in the area validate your investment hypothesis? Or could high vacancy rates in similar properties nearby indicate a lack of potential?
By understanding the sub-market on a deeper level, developers/investors/new companies can invest more proactively and strategically.
Nod to the folks at Dealpath.com for the inspiration.