Return Drivers for Commercial Real Estate
The key drivers for the commercial real estate market give investors a reasonable idea of what lies ahead in their investment journey. What influences the commercial real estate market are political, economic, and geographic factors, the impact of which are further better measured by market drivers.
What is a market driver?
A driver is responsible for positive influences in the market, in the absence or weakening of which the force behind the market weakens too, which isn’t a good news for property owners or future investors.
The key driver for a retail market is economic growth. When disposable income increases as a result of economic growth, people spend more. On the other hand, a decline in economic growth results in consumers having less money, hence less spending.
Let us discuss a few drivers for return on CRE-
1. Yields - A lot of investors are not looking for just capital gains, but also some income along the way. This income is called the yield. This is the reason why many investors turn to commercial property because yield tends to be higher here than residential property. Aside from being a key driver, yield is also a key indicator of the market, given that property values are inversely related to it.
2. Employment - The roots of every strong CRE market are embedded in the roots of employment. A strong job market attracts people and an influx of these people in turn requires businesses and services to support them. This poses a requirement for additional space and hence is a good news for CRE investors.
3. Occupancy Rates - Investors obviously don’t fancy empty properties. The value of a commercial property is tied to its occupancy, so naturally, vacancy drives fear among investors. Low occupancy rates imply either a low demand or a high supply, or both. On the other hand, if the occupancy is high, it implies that there aren’t enough units for new tenants to lease. Hence, if the investor owns a property in a high occupancy area, he is at low risk of vacancy because tenants do not have a lot of options for relocation.
4. Demand and Supply - Investors should not only look for current supply and demand in the market but also the upcoming supply that is coming on the market in the upcoming years.
5. Amenities - An access to amenities and facilities in the neighborhood affirms good returns on the property invested in. Car parking, food courts and retail outlets are a necessity for every day life. A commercial property that is nestled among these facilities is bound to be attractive to a customer and hence, makes for a promising investment.