Macroeconomics & the U.S. Commercial Real Estate Market

This learning series on Modern Commercial Real Estate Investing first appeared on the EquityMultiple blog. Please check in there for updates and additions to this series.

Commercial Property for Sale

The Current Commercial Real Estate Landscape in the U.S.

In cities, towns, and suburbs throughout the developed world, real estate is all around us. When tallied up, the sheer volume of real estate investment and commercial real estate value is truly astounding: the volume of commercial real estate transactions exceeded $500 billion in the Americas in 2016, while the total value of commercial real estate assets amounts to a staggering $29 trillion worldwide — far exceeding the value of all the gold ever mined — with 45% residing in the Americas.

As Mark Twain (may have) said — “buy land, they aren’t making any more of the stuff”. If — as Mr. Twain rightly pointed out — the supply of developable land is not increasing, why then does the commercial real estate market continue to grow? Real estate is inextricably linked to basic macroeconomic forces and, as populations and economies grow, so too does the demand for the built spaces necessary to carry out basic functions of a market-based society: living, working, eating, congregating, producing goods, and purchasing needed or wanted items.

In other words, as long as there are more and more of us, and we still organize ourselves into cities, towns, and suburbs, commercial real estate markets — the aggregate of commercial property for sale — will continue to grow. (more on this in the next chapter).

Here are some of the key factors and forces shaping commercial real estate markets in the United States:

  • The Rise of 18 Hours Cities and Revival of Urban Cores — The decades following World War II were characterized by a embrace of the suburbs; Americans fled many historically large, dense cities in search of more space. This movement left blighted city centers and declining urban populations in its wake, particularly in the midwest. In recent years, educated, relatively-young residents have returned to urban downtowns at a high rate in search of shorter commutes, a greater density of cultural opportunity, and “live-work-play” amenities. This trend is far from uniform, however — researchers have noted that demand for downtown living is largely isolated to educated, affluent professionals. Even so, the urbanization trend among relatively-affluent workers is a key consideration for real estate developers and investors, as it drives demand for Class A, high-density multifamily, boutique retail space and modern office buildings.
  • Continuing Suburbanization — Despite much-publicized urbanization among educated, relatively-affluent professionals, most demographic groups continue to shift to the suburbs, where housing is cheaper and overall cost of living is lower. In some areas, this trend may extend to educated knowledge workers. For example, in suburban Provo, UT (affectionately dubbed “Silicon Slopes”), recreational opportunities and cheaper rent have helped contribute to a booming tech hub. The growing prevalence of telecommuting and satellite offices may stimulate further suburbanization, as tech workers can maintain high-paying jobs while paying less for housing and avoiding onerous commutes. As downtowns become less affordable and density of suburban areas increases — particularly among working families — a supply shortfall has emerged in “workforce housing”, which is likely to impact real estate investment in years to come.
  • Ecommerce — In 20 years Amazon has gone from a bookselling upstart to a behemoth that touches over 50% of all online retail transactions, turning traditional retail on its head along the way. Some large traditional retailers like WalMart and Target have adapted, while others are wilting away under the pressure of retail’s rapid technologization. The implications for commercial real estate are huge, with many malls shutting down entirely and name-brand retailers shuttering brick-and-mortar locations across the country. Innovative retailers — like Sephora, for example — have found ways to adapt, however, integrating technology and omnichannel experiences into their business model, and pursuing real estate that aligns with a boutique experience.
  • Global Volatility — Regime change, geopolitical conflict, and climate change concerns all stimulate investor demand for relatively safe, stable assets. In recent years this has prompted a focus on gateway cities like New York, Chicago and Los Angeles, with foreign investment dollars pouring in and contributing to fears that these local real estate markets are overheating.

These broad trends are important to keep in mind, and can help provide context around return projections and investment theses. Remember, though, that “location, location, location” remain the top three things to evaluate — each market and neighborhood comes with its own set of considerations when it comes to a potential real estate investment.

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