Buying or Selling Commercial Real Estate? Four Things to Consider
Working with buyers or sellers of commercial property is what we do on a daily basis!
Our economy is currently a mixed bag. This year, there has been general economic uncertainty with bank failures and a slow down in the economy.
Nevertheless, many asset classes in commercial real estate are performing better than their pre pandemic levels, inflation is cooling, and the US has a very strong job market.
If you are consider buying or selling commercial property right now but are a little lost on what is happening in the market, you’re not alone.
Here are four points to keep in mind if you are thinking about buying or selling commercial real estate.
1. Despite A Potential Recession, There Is Still Plenty of Activity
While many sectors in commercial real estate have had a slow down in transaction volume, slower rent growth, and higher vacancy rates than the previous year, most sectors are still doing well relative to pre pandemic performance.
In the multi family sector, the 12 month absorption is 116,037 with 2.5% rent growth. However, this is a significant slow down from the 2021 record levels with annual rent growth at 10.7%.
In the industrial sector, the 12 month absorption is 361.9 million sq ft with a 10.3% rent growth. Although the industrial sector has had a slow down this year, the current industrial absorption level is twice the pre pandemic industrial absorption level.
Retail absorption in the past 12 months is 63.9 million sq ft with 3.8% 12 month rent growth. Absorption rates have declined since last year but the retail vacancy rates are lower than in 2022 and before the pandemic.
But some sectors, like the office sector, are still struggling to recover.
Even if activity has declined in the past 12 months, relative to historical norms, many sectors are still fairing well.
2. Set Realistic Expectations
We are not in the same market as we were 12 months ago, and 12 months from now, our economy may look very different than it does currently.
Therefore, whether you’re buying or selling a property, be realistic in your expectations.
The Economy
Our economy is a currently mixed bag.
Lending
Bank failures earlier this year set off a wave of economic uncertainty. According to Pensions & Investments, The Federal Reserve’s April 2023 Senior Loan Officer Opinion Survey of Bank Lender Practices showed that 46% of banks said they have tightened up commercial and industrial loan standards over the past few months.
Most of the tightening took place across all commercial real estate loans and sectors.
Because of the tightening on commercial loans, buyers capable of purchasing with all cash are beginning to have an competitive advantage.
Other Variables
Inflation is starting to ease compared to 2022.
Job growth remains strong at 3.1% (compared to March 2020) with a very low unemployment rate at 3.5%.
Despite these facts, the economy is not what it was 12 or 24 months ago.
In 2021, economic growth was the highest it had been in 40 years at 6%.
By the end of 2022, the growth was 2.6%, and GDP is projected to grow by 1.2% this year.
With all of these factors to consider, there are sellers who are still hanging on to prices that were a reality 12 months ago. There are buyers who believe the tides are starting to turn in their favor.
We can’t live in the past, and there’s no way to know the future, so be realistic considering our current market, prices, and economy.
3. Keep the Future in Mind
The Economy
Although you cannot make a deal based on what may or may not happen in the future, like any prudent person, think about what may happen in the near and distant future.
Is inventory for a particular asset class expected to be over built, or are rents projected to increase steadily?
Are there new developments that could impact the value of the property? Are there any new zoning ordinances that will take place?
The future of the economy is uncertain, so consider all factors that impact a specifc property.
Talk to a commercial broker who is not only an expert in the asset class you are buying/selling but also in that particular street, submarket, or market.
Your Personal Future
If you have a personal portfolio of real estate or have access to capital to invest, consider the goals for your life, company, etc.
More important than economic forces are the owner or buyer’s individual personal goals, circumstances, and opportunities at the moment.
4. Know The Asset Class
Know the asset class you are considering buying or selling! A particular asset class may have a strong demand in an economy that is slowing down overall.
Alternatively, a particular asset class may not be in much demand even in a great economy.
Be aware on the projected inventory levels, rent growth forecasts, and the overall market for a particular asset class. Do your own research or consult with a commercial real estate agent who specializes in that particular asset class.
Conclusion
If you’re thinking about buying or selling commercial property, consider these four points outlined above.
If you’d like to discuss this blog or anything related on commercial real estate, let’s connect.
Emma McDaniel
McDaniel and Company
864-576-4660 O
emma@mcdanielandco.com
Sources
https://www.pionline.com/interactive/banks-tightening-commercial-industrial-loan-standards
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