The Secret to Certainty in Commercial Real Estate

When does 3 = 1? The answer is in commercial real estate. When looking at the commercial real estate market, we must actually look at 3 different markets.

I. The space market: This is the physical space that exists in the market. The measure of the space market generally comes in the form of absorption rates.  In the space market, the goal is to predict the future by looking at supply and demand in an area.  This is never more critical than in retail properties. As there are more people in an area, more retail is required.  As people migrate away from an area, retail will die. As current and future retail property owners and developers, absorption rates are critical as is looking at the migration of the population in a geographic area.

II. The capital market: As much as you love real estate, it is only one of several places where you can invest your money.  Stocks, gold and bonds are examples of other places where you can invest.  To determine where to invest your money, you will generally compare the rate of return you can get from alternative investments.  Once you set your desired rate of return, you can then evaluate which investment is the best vehicle to get you there.

III. The property value market: This is the market where cap rates come into play. Any change in the income or expense of the investment will change the cap rate, because the cap rate is only a "snap shot in time".  However, as savvy investors know, you make your money in an investment 2 ways: 1. Buy it right and 2. Control expenses.  These are both functions of the property value market.  In addition to operating expenses, you will also want to stay aware of legislative and tax law changes.

In order to be successful with your commercial real estate investment, you must be aware of all 3 markets. When you are, you will begin to see when it is time to make your move, either into or out of a market and/or investment.

Working with a qualified professional is an important part of your process. You need to choose wisely as there are very few professionals who are well versed in all 3 markets. After all, you can make a deal by considering just 1 of the markets, like say the property value market (ie: cap rates). However, the question becomes, do you want to make a deal or do you want to make a great investment?  

Choosing a professional with the CCIM designation puts the expertise on your side so you can make a great investment. That foundation is what helps to give you certainty with commercial real estate.