Commercial real estate investors fall into two categories: Those who search for a property and those that research the market.
Scanning real estate listings and hoping an investment gem will fall in your lap is like taking an exam without studying. For success in the commercial property market, you’ll need to do your homework and answer three questions:
Where has the property market been?
Where is the market today?
And where might the market be going?
No investor knows precisely what will happen in the future; forecasts have been wrong in the past. But it’s not like successful property investors are just lucky. You can apply rational logic, born from hard-nosed research, to allow the best chance of a successful real estate investment.
Here are 5 ways experts research the commercial property market.
1. Compare the states, cities and regions
Queensland has rugby, Victoria has the races. Tasmania’s population only has 13% of immigrants and WA has a whopping 33%. New South Wales has 7.54 million people in their borders and Queensland a lot less at 4.69 million.
Australia is big, and it is diverse: in culture, in environment and in economies. So, your first step in property research is acknowledging that one state’s declining economy doesn’t mean another’s.
A state showing signs of recovery after a long time in economic darkness might mean more opportunities for commercial property investors as green shoots begin to emerge.
Once you’ve chosen your ideal states, aim your investor arrow at capital cities, where you’ll find most of the country’s population and job growth.
Lots of things happen in the big smoke – new infrastructure, new jobs, new people entering the employment market and more money changing hands in a large economy. Manufacturers need industrial space, retailers need retail space and office workers need offices. These positive influences have big impacts on the local commercial property market. The commercial property market is far more dynamic in capital cities as a result.
Also consider a city’s fringe districts, developing suburbs and regional zones. A city’s healthy economy might rub off in these areas. Just last year, Sydney’s city fringe was the fastest rising office leasing market in Australia, with effective rents growing about 30 to 35 per cent over the year to April.
2. Pick an asset class
From large format retail centres to nursing homes, the choice of commercial property investment classes is enormous.
If you’re already an investor, sit your portfolio on the scales and look how it’s weighted. You might be heavily exposed to retail properties, for example, and this could be a reason for divestment or diversification into office or industrial.
When figuring out which asset class deserves your investment, first-time investors should establish an ‘investment policy’: A set of standards you’re loyal to when researching investment opportunities.
If an asset doesn’t satisfy all (or most) of your conditions, you might look elsewhere.
So, take a macro view of the economy and the population’s behaviours: Are retailers getting customers through their doors? How much infrastructure and development is being planned? Is there growth in job advertisements for white collar workers?
The answers are clues to finding a robust commercial property investment.
3. Study sales data
Thanks to the internet, you can now collect more property sales information than any real estate expert would hold 10-20 years ago.
PropTech applications and property data providers, like CoreLogic, will take a valley of online information and predict property values and rental yields for you. Study this data and do your best to see what land values and yields are doing. Now, how do these numbers compare against the market?
You’ll quickly discover the web of information on offer, which is why you might let an expert untangle the data for you.
And remember that technology doesn’t always outshine traditional information sources. Networks with first-hand insights and expertise will help you stay abreast of market tailwinds. Without these sources you’re at risk of being over the odds.
4. Understand supply levels in the market
Economics 101: If supply levels are low, tenants will compete for properties because there is less choice (i.e. greater tenant demand). This is a ‘landlord’s market’, where commercial property owners can typically push up rental payments for tenants, who are hungry for a suitable premises. These properties won’t be cheap though, so landlords should prepare to pay a premium.
Turn the table and things aren’t so good for landlords.
Imagine a tonne of properties are available on the market. Tenants are spoilt for choice and can be selective. It’s competitive for landlords, so they might entice businesses by offering lower rent and generous incentives. Property owners can struggle if they’re not prepare for these tough times so it’s important not to purchase an asset that’s abundant in supply.
With all the factors to think about in your market research, the ironclad law of supply and demand is a good indicator to go by.
5. Know the leasing market
Successful commercial property investment means understanding what tenants want. You’re looking for investment-grade properties after all, so it’s important to really consider the source of your rental income: the tenant.
Find out how deep the occupier demand goes for your chosen asset class, and then appeal to those who are looking to lease.
And if market data is difficult to digest, don’t forget those traditional approaches. For example, take the number of ‘For Lease’ signs on the streets as an indicator. If you’re seeing a lot of empty property, you’ll know the leasing market is tough for landlords.
After reading these market research tips, you might ask, ‘surely there’s more to it?’ And you’d be right. Market research is a bottomless pit. The trick to understanding the stages of good research is building on experience and cementing your investment standards.
Properties & Pathways provides commercial property investment to both first-time and highly experienced property investors. If you’re interested in joining one of our syndicates, get in touch today.