Predicting Commercial Real Estate Appreciation Trends
Can HousingAlerts.com be used to predict commercial real estate appreciation trends?
HousingAlerts specifically tracks local residential markets but the cost/benefit and importance of knowing the residential market makes it a no-brainer (in my opinion) for any commercial investing.
The HousingAlerts system relies on repeat residential property transactions because for TA to work, you must have **absolute accuracy** in the underlying database. The reason is simple. TA "tracks" subtle changes and, in a sense, magnifies them.
Although most local real estate cycles seem to hit both commercial and residential properties **around** the same time, commercial may have different time lags. There are not enough "repeat" transactions in commercial markets to develop a statistically valid sample size that will produce the kind of accuracy needed for Technical Analysis, so we use residential as the next best thing! Of course, it makes a huge difference what kind of "commercial" property we're talking about. There is (obviously) a more direct timing correlation between commercial and residential real estate if you're referring to "small" commercial properties like a 5 or 10 unit apartment project rather than a 100k sq. ft. 'downtown' office building. Investing in commercial "retail space" is tightly correlated to the health and trends of the local residential market.
Generally, "dead" housing markets are also likely to be "dead" or weak commercial markets; strong or emerging residential markets indicate much stronger upside potential for commercial. When it comes to nailing residential home value trends, there is nothing better than HousingAlerts.com - and residential trends are a useful proxy for commercial in many ways.
In other words, if the particular commercial market you're evaluating has a "sick" residential market or the long term trends are weak - you should apply very different investment evaluation criteria compared to a similar commercial property in a strong market (i.e. - discount the future cash flows at a higher rate, be more conservative in the appreciation assumptions, avoid that market entirely, etc.)
I would use, among other tools, the same market selection criteria to invest commercially as I'd use for residential.
Commercial property **generally** follows these same trends. There are many commercial markets I wouldn't waste any time with based solely upon their long-term residential market trends.... and there are emerging residential markets I'd be very interested in exploring for commercial opportunities.
Because future appreciation (or depreciation) is far and away the most 'sensitive' variable to any commercial (or residential) project's ultimate economic success or failure - I believe the game is won or lost in the "market selection" phase; everything else takes a back seat.
With so many alternative market choices out there for you to consider, and given the long time horizon to realize the turn-around and appreciation once you commit to a deal - the FIRST decision should be "WHERE" do I invest.
Using HousingAlerts to help answer that question is a quick, easy and inexpensive way to screen prospective commercial markets.
Once you've narrowed your market choices using HousingAlerts, the SECOND step is to then research micro-market trends such as landlord concessions, vacancies, absorption, etc.
Only at the THIRD level should you bother looking at "deal" specific items such as NOI enhancement potential, rental rates vs. market rents, etc.
The first step - Market Selection - is the most critical Due Diligence step in the entire commercial real estate investing process (imo).
As with residential... if you get the market selection step correct in the beginning, then you've paved the road for success. Get it wrong and you'll be swimming against the tide for the entire investment period.
A "good deal" in a bad market severely limits your upside potential (or worse) and eats your time and resources. Personally I'd never consider ANY commercial investment without first knowing the state of its residential market. With HousingAlerts, you can now 'check-off' that DD step in a matter of a few minutes. There are always "forced appreciation" deals to be found in any market. However, the true massive wealth comes from "automatic appreciation" - being in the right place at the right time. The key is to combine both; only do great deals in great markets!