How the Current Economic Situation Has Impacted Commercial Real Estate Investors

How the Economy Affects Real Estate?

The overall economic conditions impact real estate prices. Economic conditions are measured by evaluating economic indicators, including, among others, employment data, GDP, manufacturing activity, and inflation. In general, if the economy is slow, real estate follows a similar trend. Some of the economic factors that affect real estate prices include:

•  Interest Rates –

  Shifts in interest rates affect people’s ability to purchase real estate. This is because when interest rates drop, the cost of obtaining mortgages also drops. Consequently, the demand for real estate increases, and over time this pushes prices up. Conversely, a rise in interest rates leads to an increase in the cost of getting a mortgage, which lowers the demand and the price of properties.

•  Demographics –

  Demographics are statistics that illustrate the differences in a population, such as income, migration patterns, population growth, gender, and age. These statistics have a huge impact on the kind of real estate that’s in demand as well as how properties are priced. Major demographic shifts can have a long-term and significant impact on the real estate market.

•  Government Policies –

  Government legislation and policies, including subsidies, tax incentives, and deductions, can hinder or boost demand for properties.

What Happens to Commercial Real Estate in a Recession?

Typically, the occupancy rate in commercial properties drops during a recession. Furthermore, late payments increase. Having fewer paying tenants translates to a decrease in NOI (Net Operating Income, which is expenses and gross rental income).  This lowers the income approach during commercial appraisal, which decreases the property value.

How to Evaluate Commercial Real Estate Deals

1.  Evaluate Social Economic Factors

By assessing various factors such as seasonal trends, inventory mixes, and construction costs, as well as planning strategically, you can find worthwhile investment opportunities. For most, a slugging economy is an unwelcome sight, but it does avail great bargains for first-time buyers and investors in areas where property prices have significantly dropped. Besides, having basic knowledge of interest rates and how the rates are influenced by the economy can help you make better investment decisions.

2.  Examine Demographic Trends 

As an investor, you can spot trends before they become apparent by studying the demographics of the areas you are targeting for your real estate project. For instance, millennials who’re building careers and likely starting families have different housing needs compared to, say, baby boomers who are close to retirement. By understanding the prevailing demographic trends in an area, you’d be able to understand the needs of your prospective clients.

2021 Commercial Real Estate Outlook

•  The Demise of Certain Sectors

Malls and retail have been on the decline, even during the 2019 boom economy when there were around 12,000 retail closures, as reported by the Washington Post. This will likely accelerate as retail declines further due to the pandemic, which has led to the fall of some of the biggest department stores in the U.S.

Conversely, according to a recent study by Nareit, eCommerce, data centers, mobile home parks, and self-storage are on the rise. Investors should be innovative and seek repurposing opportunities such as convert malls into data centers or hotels to facilities for senior living.

•  Demographic Shifts

Americans are increasingly moving from locations that don’t suit their lifestyles to areas that suit them better. Additionally, the shift to working from home and the changing preferences due to the pandemic will accelerate the movement.

With good research and proper planning, you can find great investment opportunities in the real estate market, despite the current tough economic conditions. At Fidelity Mortgage Lenders, we can help you secure the right commercial real estate loan to meet the unique needs of your business. To get started, contact us or give us a call at 800-752-9533.