What Constitutes CRE Price Drops?
Commercial real estate (CRE) property prices are influenced by many factors. Price drops or price increases among these properties may be predicted once these factors are analyzed, which include Supply and Demand, Demographics, Location, Interest Rates, Economic Situation, Government Policies, and Global Shifts.
Supply and Demand
Supply and Demand are two of the most basic concepts in the economy. These factors influence several aspects of the economy, most especially real estate properties. The theory of supply and demand in Economics states that if the demand increases while supply decreases, prices will increase; whereas when demand decreases and supply increases – prices will drop.
If there is a large number of investors looking for commercial real estate (CRE) properties but there are not much buildings, prices will increase. Similarly, when there is a huge supply of buildings but only few buyers, the CRE property prices may probably drop. However, this is still reliant on other factors, as well.
This factor is often overlooked but is very crucial in determining CRE property prices. Demographics refer to the characteristics and composition of the population, such as age, income rate, civil status, race, gender, and population growth. The characteristics of the population will influence the kinds of businesses to be built, what businesses will boom, and the prices of CREs. Major changes in the demographic characteristics will greatly affect businesses and CRE prices for years, or even decades.
For instance, is the trend among millennials opting to have 2 or less children. Using this trend, investors, developers and businesses will try to accommodate the needs of this small family.
It is already a given that the location is one of the most critical factors affecting CRE properties’ market value. Different locations mean different demographic characteristics, which would also mean different needs. Furthermore, the location where the property is situated can either detract or add potential investors. The access to amenities, such as power lines and transportation will affect the demand for the property.
Crime rates and doubtful businesses will detract investors. Unpleasant neighbors will also scare off potential buyers. CREs around this area will most likely lower down their value for them to get an offer. On the other hand, low market value of CRE may be the result of sketchy businesses coming into the neighborhood.
It is safe to say that cheaper prices are not always the best option.
Interest rates also have a major impact on the CRE property market value. Interest rates of CRE loans fluctuate. This is a crucial matter especially when you are the one putting up your property for sale. If banks decide to increase the interest rates for loans, it is a possibility that mortgage lenders will also follow.
Higher interest rates mean higher mortgage payments. This is a huge turn-off for most. Whereas, when interest rates are low, potential buyers may increase because of equally low mortgage payments.
Thus, when interest rates are up, CRE properties are less attractive which would force them to lower their market value. Consequently, when interest rates are low, CRE properties are more attractive, which would mean a higher market value.
The economy may be favorable to some businesses, but not to some. This situation, unfortunately, is outside of anyone’s control but the government.
But you can analyze the economy and check if it is working on your side for you. You can check the health of the economy by examining the economic indicators: Gross Domestic Product (GDP), employment data, the prices of goods, the manufacturing activities and so many more. Generally, when all of these indicators are down, so will real estate properties. If this is the case, you might want to hold and sell your property only when the indicators rise back up.
Government action and legislation greatly affect the demands and prices of commercial real estate properties. It can impact CREs through tax credits, deductions, and subsidies. These policies can temporarily boost the demand for real estate properties until they are withdrawn.
However, the decline in GDP and other economic indicators may opt for the government to increase taxes from other businesses to keep the economy afloat. This will definitely negatively affect CRE property prices.
Therefore, being aware of the current government policies, legislation, and programs sure is an advantage. It can help you determine the changes in the supply and demand of CRE and identify false trends in the economy.
The contemporary world suggests that when you make business, you must not focus only on your community but for a global scope. Entrepreneurs are connected despite the geographical proximity. When a country’s economy spirals down, one must also look into the possibility that it may affect their business. Take note that your products do not come from one country alone, and when one country’s economy is down, you should also look at the economic indicators of your country. The effect may not be immediate, so it would be best when you look at the trends from time to time.
Pandemics can also greatly impact the demands for real estate properties. For example, the COVID 19 pandemic made major changes in work and school arrangement. Majority of the population practiced working from home. It greatly made an impact on the demand for commercial real estate.
Another global shift to take note is the boom in online shopping platforms. Physical stores are no longer necessary. Customers are buying straight from the warehouse and shipped directly to their homes. This can negatively impact CREs.
So, will commercial real estate prices drop?
There is no definite answer to that. This is a changing world. Trends may continue to evolve. Government policies and programs also adapt to these changes. Furthermore, the economy is a cycle. It may drop now due to the innovations and current events, but it will rise back up, just like how the world overcame the great depression. The key to better anticipate these price fluctuations is to be well-informed of the current situation and of the factors listed above to know the market value of your property.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at email@example.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE