Negative Factors and Commercial Real Estate
10 key factors that negatively effect the commercial real estate market
In commercial real estate market, it is not hard to get sucked into considering the corporate investment rates and job market as main factors affecting the industry. It is recommended that a realtor must take a broader perspective. Here are 10 key factors that negatively effect the commercial real estate market.¬†
1. Unpredictable global events
Unpredictable global events, for example terrorist attacks or financial crisis, have a profound effect especially on commercial real estate market. The market responds to this uncertainty by holding off its projects and expansions. Weather-related disasters may also render a damaging effect.
2. Growth of mining natural gas industry
Mining natural gas is a growing industry with environmental risks that may lead to boom-and-bust in local commercial real estate markets.
3. Technology providing options other than brick and mortar offices
Technologies are changing, and this has brought a decline in demand for traditional work places.
4. Slow economy
Another essential factor affecting the demand for commercial real estate is the all around health of the economy. Health of the economy is generally measured with the help of indicators like GDP, commodity prices, manufacturing activity, employment data etc. Generally, sluggish economy leads to slower real estate.
5. High Interest rates
A period of high interest rates will raise the cost of mortgage payments and can cause lower interest in buying a commercial property.
High rates of interest also make renting relatively more appealing than buying. Such high interest rates make real estate investing less profitable and more challenging.
6. Demographic change
Major alternation in the demographics of the nation can have a big effect on commercial real estate trends for many decades.For example, seniors born between 1945 and 1964, are one example of a demographic trend that significantly affects the real estate market. The transition of these seniors towards retirement is among the more interesting generational trends of the last century that has effected the commercial real estate market.
7. Trust deficit
Trust is essential for buyers to take the risk of getting a mortgage. In particular, confidence in the real estate market is important. People will defer buying if there is an environment of fear.
8. Low Mortgage availability
Throughout the boom, many banks were keen on lending. They allowed individuals to borrow large multiples of their income(eg 5 times their earnings). In addition, banks needed very low deposits. This straightforward process of getting a mortgage resulted in the growth of real estate market as more businesses were now in a position to buy. After the recession of 2007, banks tightened their criteria for lending. They also started demanding a larger deposit. This has reduced the availability of mortgage loans and demand for commercial real estate has fallen.
Prices fall mainly because supply is greater than the demand. This generally happens when the property market is low.
10. Unfriendly Government Policies / Subsidies
The legislation can also be another factor that may have a significant impact on property demand and costs. Tax credits, deductions and subsidies are ways government can use to boost the demand for commercial real estate. Awareness of current government policies will help you determine changes in demand and supply and to identify potentially false trends.
This article introduced a few of the higher-level factors that play a role in moving commercial property market, but there‚Äôre also more complex parts that come to play. Although a few of these above mentioned factors largely rule the market prices, the outcomes can be very different in practice. However, knowing these key factors that drive commercial real estate market can help you evaluate your investment.