Is now a good time to start investing in commercial real estate? | Expert column
Commercial real estate investment has historically been a reliable way to build wealth and diversify portfolios.
If you’re considering entering this market, you might wonder if now is the right time? In addition to exploring the current state of commercial real estate and what influences its outlook, this column offers practical insights for potential investors.
There is an overall positive outlook for commercial real estate in what is left of 2024. The multifamily sector is doing exceptionally well, as high mortgage rates have spurred demand for apartment buildings. The industrial sector continues to be strong, and is not expected to slow down, due to the long-lasting impact of e-commerce.
Although demand is not high, the retail sector is benefiting from its limited supply, which has resulted in low vacancy rates thus far in 2024. The sector most negatively impacted this year has been office space with office vacancies reaching record highs. Hotel properties, on the other hand, have been performing well with occupancy rates back to pre-pandemic rates.
Factors influencing investment
Several key factors affect whether commercial real estate is a good investment right now:
Interest rates and financing: Commercial real estate goes hand in hand with commercial lending, a very important factor for potential investors to take into consideration. Interest rates have been an especially “hot topic” for 2024. The Federal Open Market Committee has met five times so far, but has yet to make any changes. The committee’s next meeting is set for Sept. 17-18 and there is much speculation of a possible interest rate cut.
Between March 2022 and July 2023, the interest rate was increased 11 times, stabilizing at the range of 5.25% to 5.5% — where it has remained since July 2023. The main takeaway is that even with potential interest rate cuts, it will take time for notable change to occur.
Leigh Houghland, senior lending officer for Chesapeake Bank and regional executive for Chesapeake Bank’s Williamsburg Market, provided insight from a regional bank perspective. His outlook is more positive in terms of commercial lending: “Yes, we have felt and heard that some of the larger banks are just not choosing to do commercial real estate at all unless it is owner occupied. At Chesapeake Bank, we continue to lend. Our loan portfolio is up 12% year over year, while most of our peers are low single digit growth or their loan portfolios are shrinking. And we continue to do deals on owner occupied and investment properties. Higher interest rates certainly make the math on CRE purchases more difficult. In some cases, buyers have been able to get the seller to lower their price a little to make the project viable for the new owner.”
Local economic conditions: Investors need to be aware of what is happening in their local economy when choosing commercial real estate investments and the Hampton Roads Economic Monthly is an excellent resource for those in our area. It is prepared by regional economists for the Hampton Roads Planning District Commission. In the July issue, both retail sales and hotel revenue were reported to have gone up in Hampton Roads. Furthermore, based on data from the Bureau of Labor Statistics, HRPDC reported the largest civilian job growth for the Hampton Roads area occurred in health care and social assistance, construction and educational service. Lastly, what is most notable in regards to our local economy is “the unemployment rate remains below 3% and more than a percentage point below the national average.” Thus, the local economy does not always sync with the national economy and can impact how one chooses to invest.
Sector-specific opportunities: Commercial real estate is made up of many sectors. For those interested in investing, it is important to understand the type of properties available. The following sectors are options to explore: multifamily-apartment, industrial-warehouses and distribution centers, office buildings, shopping centers and malls, self-storage units, data centers, hotels, medical office buildings, student housing, senior housing, mixed-use properties and land.
Regulations and policies: Government rules, zoning laws and tax incentives affect the profitability of commercial real estate investments. Staying informed about these regulations is crucial for minimizing risks.
Tips for investors
If you’re thinking about investing in commercial real estate, here are some practical tips:
Research and due diligence: Study local market conditions, vacancy rates and rental trends. Thorough research helps in making smart investment choices.
Financial planning: Analyze potential returns and financing options carefully. Consult with experts to ensure your financial strategy is sound.
Risk management: Diversify your investments to spread risk. Consider long-term leases and stable markets to reduce volatility.
Long-term approach: Real estate investments often pay off over time. Patience and a strategic approach can lead to profitable outcomes.
Innovation and adaptability: Incorporate sustainable practices and tenant-friendly features to enhance property value.
Although post-pandemic years have proven to be challenging, there is still much opportunity ahead. With the right approach, today’s market is looking hopeful for commercial real estate investors, and now would be a great time to start investing.
Elise Campana Lahneman is an associate broker with Campana Waltz Commercial Real Estate West. Learn more at cwcrew.net.
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