Undoubtedly, commercial real estate comprises some of the most attractive investment opportunities currently available. There are approximately $4.5 trillion worth of revenue-producing commercial real estate properties in the U.S. alone.
But sourcing the most productive properties in the most productive markets can be a challenge, even for the seasoned investor. That’s why the pros conduct a commercial real estate market analysis before investing in any CRE property.
A market analysis targets specific metropolitan statistical areas (MSAs) and submarkets to consider various factors that could make a property investment profitable. An investor obtains data on local economic factors, demographic details, and other considerations to make decisions.
In this article, we explore the importance of commercial market analysis, the steps to conducting a thorough examination, and how technology can boost your capabilities.
The Importance of Real Estate Commercial Market Analysis
The world is at a critical juncture, especially when considering CRE investments. Without proper market analysis, the potential that investments underperform, fail to generate revenue or cause significant losses skyrockets.
Likewise, many economic factors have experienced worrying market trends, such as record-high numbers of remote workers lowering the need for office space. Furthermore, the Fed continues to raise interest rates, which makes it more challenging to obtain liquid capital at rates that foster portfolio growth.
There is speculation surrounding various property types, such as the need for office buildings, especially as the world digitizes. The increase in remote work and e-commerce indicates the need for new commercial property types, like supply chain warehouses, distribution, and data centers.
Indeed, the work-from-home and online shopping trends are shaping the economy in new ways, accelerated by the pandemic. We can look to Blackstone’s failing CRE investments to understand what can happen when a proper market analysis isn’t in place.
Their retail and office market is witnessing a drop in property values in large cities like Boston, New York, and San Francisco, causing them to default on several loans. Cities like Dallas and Austin also saw massive downtrends but are rebounding quicker than others.
As more people can work from home, smaller cities are seeing a population boom and an increased valuation of property. The U.S. Census Bureau supports these findings with a 13.3% jump in the western small-town population between 2010 and 2019, pointing to new opportunities by performing an in-depth market analysis.
Steps to Conduct a CRE Market Analysis
Conducting a market analysis is essential for asset management and generating revenues and profits. The ability to identify untapped submarkets and properties ripe for rent growth will help reduce risk while generating portfolio growth. Here are the steps to conducting a CRE market analysis that supports your investment strategy.
1. Defining the Objectives of the Analysis
Before engaging in any commercial real estate investment market analysis, it’s crucial that you identify the objectives. These are clear, realistic goals for the rates of return, length of investment, and time commitments.
As with any business decision, setting goals will guide you toward success, and the process is key. The most popular method is S.M.A.R.T. goal setting, which forces you to be specific and identify trackable metrics.
While 50% returns would be a dream come true, the S.M.A.R.T. method also forces investors to make goals that are achievable and relevant in the context of market trends. Finally, you must have a clear timeframe for your goals through metrics like LTV and anticipated holding time.
This structure will help you define which real estate sectors to invest your time, money, and energy. Your goals can help you decide between multi-family, retail, and industrial properties by narrowing your focus.
2. Gathering Relevant Data
Data builds knowledge, and knowledge is power, meaning the more data you have, the better you can make decisions. Real estate investors make a living from accurate data, and some of the crucial factors to obtain market insights on include:
- Demographics – Who lives in the area? What jobs are available? Is the population growing or declining?
- Socio-economic factors – What’s the median income and spending power? What is the average cost of living?
- Vacancy rates – How many properties are vacant? What is the average occupancy rate? Do property management companies control properties, or do private investors?
- Capital market access – How easy is it to obtain capital? Do secondary markets service borrowers?
Investors can get accurate data from a number of sources. Popular websites include:
- Data.gov – The government’s open-source data center.
- The U.S. Census Bureau – Accurate information on demographics.
- National Association of Home Builders – Up-to-date info on home building trends.
- Blooma.ai – An all-in-one CRE platform for centralizing your commercial real estate portfolio.
Additionally, investors will want to consider the real estate industry as a whole. The health of the industry can impact investments. For example, the higher interest rates we’re experiencing contribute directly to softer demand and reduced property valuations.
3. Analyzing the Data
After compiling data, you need to evaluate that information to see what it’s telling you. Organize that information into logical sections and take note of trends and potential challenges. These challenges can include factors like the ability of tenants to pay rent or a decline in retail sales.
Your ability to deduce the root causes for the data you collect will help you make accurate forecasts and make informed decisions. Of course, including experts and advisors in the decision-making process will elevate your ability to make the right call.
4. Drawing Conclusions and Making Decisions
Now that you have analyzed the data, formulated plans, and made decisions, it’s time to create actionable steps. These actionable steps could be moving forward with offer sheets, obtaining capital, and closing the deal.
On the other hand, if your analysis points to investments that don’t meet your initial criteria, then your actionable steps could be to return to the drawing board and investigate other MSAs and submarkets.
Challenges in CRE Market Analysis
One of the most significant challenges in performing a commercial real estate market analysis is obtaining accurate information and organizing that data into a coherent evaluation. Spreadsheets can only get you so far, and many investors are turning to technology to help eliminate those challenges.
Another vital issue is evaluating the quality of potential investments. And like obtaining and organizing data, technology can help here, also. Using technology to sort through potential properties against your priorities gives you a more holistic view.
The Role of Technology in CRE Market Analysis
Technology is one of the best solutions to the challenges in performing a market analysis. A comprehensive CRE platform can centralize data collection, metric analysis, investment scoring, stress testing, and modeling, giving you unparalleled insight into your CRE portfolio.
Additionally, technology automates many tasks, including manual entry, which helps eliminate inaccuracies or errors. You can automatically move properties through various steps of your investment process and follow up without lifting a finger.
Investing in such a platform can boost your investing potential in countless ways, and Blooma’s revolutionary program streamlines your CRE buying and underwriting processes. From origination through portfolio management, you can control every part of the process in one place.
Blooma is Your Partner for Automated Underwriting
Market analysis is at the heart of real estate investing, and performing a detailed evaluation helps make informed decisions that translate to sustainable profits. Plus, when you pair that market analysis with cutting-edge technology, you’ll have a competitive advantage other investors don’t have.
That competitive advantage is Blooma’s CRE software. Your entire portfolio and investment strategy can now exist in one place. Request a demo of the Blooma platform to see how you can streamline your investment strategy with world-class technology.