Despite some recent concern about slowing volume of commercial real estate sales, the outlook for commercial real estate continues to look good. Several national real estate publications and research groups have noted that the total volume of commercial real estate sales has declined in 2016 and 2017 compared to 2015 by as much as 11 to 23 percent. They also point out that 2015 was the strongest year on record for investment sales with volume totalling $581 billion. After 2015, 2016 was the second strongest year on record with $508 billion in total commercial sales. However, as a real estate investor, you need to understand the forces that create real estate value and if those forces are still in place.  

What drives demand for commercial real estate is positive economic growth in the form of job growth, wage growth and productivity all reflected in the overall growth of the national gross domestic product (GDP). As long as these factors are positive the environment for increasing demand and rising rental rates exists to provide upward pressure on commercial real estate values. Interest rates and capitalization rates also impact in the short-term the pricing of commercial real estate, but the underlying health of the economy is what increases the value of investment real estate over the long-term.

So what is the economy saying right now? The number one factor that drives demand for office and industrial space is job growth. If you could only choose one indicator to determine the direction of the economy and the health of the real estate market on either a national or regional basis, it would be job growth. The U.S. economy needs roughly 150,000 new jobs each month to keep expanding. Since January 2014, the job growth in the U.S. has averaged 205,000 new jobs each month with no signs of slowing. The next factor to look at is wage growth. Wage growth along with job growth is also a primary driver behind demand for real estate, particularly for apartments and retail space. Right now, American households are experiencing the strongest growth in income this century. Median household income set a new record last year of $59,039, up 3.2% from 2015 and surpassing the old record set in 1999. The wealth factor for Americans is also increasing as the stock market continues to set new records and home prices continue their upward appreciation.

The final indicator to look at is the GDP, the Gross Domestic Product of the U.S. In the first two quarters of 2017, the GDP has grown by 2.7 and 3.0 percent respectively, a healthy growth rate. We’re also seeing improving economic conditions worldwide as places like Europe and emerging markets experience some of the best economic conditions since the Great Recessions. Overall, the current economic conditions look favorable for commercial real estate investments.

With this favorable economic backdrop, what are other factors that could impact commercial real estate. Interest rates continue to remain low by historical standards despite expectations of rising rates that has persisted since the end of the Great Recession back in 2009. International capital will continue to flow into U.S. real estate for the foreseeable future as North America maintains its position as a safe haven for foreign capital. In addition to a continuing supply of investment capital for investment real estate, the construction of new properties is starting to decline in most product types as lenders become more conservative. The only weakness seems to be in regions like Houston and North Dakota that have been impacted by the volatility in the oil   industry.         

So even though the national commercial real estate sales volume has declined from 2015 record levels, its seems more an indication that the market is returning to a more stable growth pattern rather than any downturn in the making. Most recently, Warren Buffet, one of America’s most famous and astute investors, gave the real estate industry a vote of confidence by purchasing a 9.8 percent stake in Scottsdale, Arizona based Store Capital Corp., a net lease real estate investment trust. Short of a major recession, which does not seem likely in the near future, commercial-investment real estate continues to look like a good long-term investment

William Small, CCIM is the Founder and CEO of Zenith Realty Advisors, LLC, a commercial-investment real estate advisory and investment firm. If you’re interested in contacting him, you can reach him at (970) 925-3866 or by email at William.Small@ZenithInvestment.com