With much of the nation’s focus on the residential real estate market, and rightfully so since more Americans have wealth tied into the homes they live in, now, more than ever, a basic understanding of what drives commercial real estate investing success is paramount. Simply put, there are the three “R’s” -- research, relationships and returns – that are the keys to commercial real estate investing success.
“First and foremost, most, if not all, Americans can invest in commercial real estate. Whether it is IRA moneys, liquid savings accounts or home equity, the money is there to start the process,” explained Michael Anderson, Principal Broker of RealSource, a Salt Lake City-based brokerage that transacted more than $1 billion in activity for small and medium-sized investors in 2005 and 2006. “It is the decision to move forward that escapes many would-be successful real estate investors.”
The first “R,” Research, is a complicated process of economic modeling, statistical analysis and due diligence processes. “Most investors do not have the time, knowledge or money to be successful research economists;” added Anderson “In its most basic form, real estate values are driven by one interdependent relationship, supply and demand. That natural market drive to balance supply and demand produces a dynamic cycle within the real estate market.”
The market cycle to which Anderson refers consists of three distinct phases. They are: Expansion, Decline and Absorption.
Phase 1 - Expansion
Because the previous phase of the market is characterized as a period of excessive demand, the Expansion phase is depicted by construction. In other words supply, catching up to and (in most cases) exceeding demand. Because growth places heavy demand on materials and labor, this condition is also depicted as an inflationary phase.
Phase 2 - Decline
Because the previous phase of the market was characterized as a period of inflation, the market is less attractive to business looking to relocate or expand. Many jobs are lost to other domestic and foreign markets due to the high cost of living. With the job losses, and likely overbuilding, there is far more supply than demand, resulting in declining occupancy levels, rents and values.
Phase 3 - Absorption
Because the previous phase of the market was characterized by declining values, the market offers a lower cost of living. This with new government incentives offered to businesses (in an effort to bring back the economy) looking to relocate or expand, the economy starts adding jobs which translates to increased demand, occupancy levels, rents and values.
“Early on in the absorption phase is the best time to acquire income property,” said Anderson. “Proven research from a reputable company with a record of pinpointing absorption markets provides a real estate investor with the first step of a three-step process to success.”
The second “R” to success is relationships. In most cases, the absorption market will not be a neighboring market to where an investor lives and works. As such, meeting, interviewing and selecting transaction professionals who know, work and have experience in that particular market is vital to relationship building. An investor who is unfamiliar with that absorption market would be wise to choose professionals who have experience conducting due diligence on their behalf, presenting them with qualified, relationship choices.
“Once we make absorption market identifications, RealSource provides ongoing ‘turn key’ services for our clients. We help them to select the best local professionals, such as brokers, property managers, builders, title companies, and other local service providers,” added Anderson. “Even though our clients are acquiring their own properties we do have the benefit of economies of scale. The number of our investors purchasing in these markets provides us with competitive advantages.”
The third “R” is returns; the return on the property investment made and the return on future growth and opportunities. “The brokers we introduce clients to present exclusives to investors that they go and find with hard work, dedication and experience,” he said. “RealSource is with the investor long after a purchase is made. Our client advisors, for example, continually report market conditions in a timely manner and inform clients when the market(s) reaches an optimum point to sell or is leaving the absorption phase and moving into an expansion or decline cycle.”
For more about commercial real estate investing, please go to www.realsource.net.
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