The Dos and Don'ts of Investing in Commercial Real Estate - Part I
Commercial real estate has always been a reliable method of building capital with its own unique advantages over stock market investment.
higher income potential
Commercial properties generally have a <anchor>higher income potential</anchor> when compared to residential real estate. The typical annual return of a commercial property is usually somewhere between 6-12% of the initial purchase price. This number can vary depending on a variety of factors, such as the area the property is located in, current economic conditions, the credit strength of the tenant, and numerous other external factors. This can be compared to a typical rate of return of 1-4% for residential investments annually.
PART I: Projecting the Potential Appreciation on a Commercial Property
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# PART I: Projecting the Potential Appreciation on a Commercial Property

## Part I

You’ve heard the tip: “retail follows rooftops,” but how else can you predict the potential appreciation before you buy that commercial property?

Simply put, the way you make money through CRE is through obtaining cash flow, appreciation, and principal buildup through paying down the loan. In regards to appreciation, most commercial property will appreciate if maintained properly and its market doesn’t take a dive.

These questions will provide insight into the projected appreciation of the investment, and also help determine how long you’ll want to hold the property.

#### What is the current demand for land in that area?

Has the land transaction annual volume for that market been increasing? If there is high demand for space to build (A.K.A. a high-appreciation area), properties will typically be held. This leads to increased market rents. Check out the current rents for an indication of the demand of that area.

Also, rather than relying on the sales comparables or the replacement value of the building, the income approach will tell a better story of the building’s future value because it considers the amount of income it generates.

Another related factor is whether its infrastructure in place accommodates the current demand. Or, how much is planned?

Example: Surprise, AZ already had great infrastructure in place, so SimonCRE’s new master planned community, Village at Prasada, was able to capitalize on being right off the Loop 303.

#### Has there been higher migration to the area (year-over-year)?

Research for the amount of people who have moved to the area in the past three years. What is the projected growth rate annually?

Example: Surprise had a high projected growth rate of 2.7% in 2020, making it the second-fastest growing municipality in the Phoenix metro area.

Aside from the numbers, find out the story of why and what factors are leading people to make the decision. For instance, it could be the ideal cost of living, business-friendly climate, actual climate, etc.

Review recent trade area maps to determine whether there is much pent up demand — and if the city can support more demand as-is.

#### What is the current and projected growth for housing specifically?

In addition to pulling the number of planned housing units for the market in consideration when it comes to a property’s potential appreciation, take it a step further and obtain a full residential overview.

Example: A residential overview pulled for the Village at Prasada project pinpointed the locations of existing, active, and proposed communities and major employers, so SimonCRE had a visual of what to expect in the upcoming years.

Moreover, how many home builder permits were issued in the past year?

Example: Surprise had a healthy amount of more than 780 single-family permits issued in the last five months alone.

Another indicator of the housing growth is the sale-to-list-ratio, or what the median listing and median sold prices are. Which way is it trending year-over-year?

Example: In February 2021, homes in Surprise sold for approximately the asking price, essentially resulting in a sale-to-list price ratio of 100% for that month. As of Q1 2021, it is currently described as a seller’s market, having more demand than supply.

#### Are businesses flocking to the area?

Last but certainly not least, the aforementioned “retail follows rooftops” alluded to factoring in the interest from businesses to be in the area.

Example: “The Loop 303 Corridor” in Surprise has picked up recognizable momentum, with the opening of a new Costco location accelerating the desire from other businesses to strongly consider the area.

“Costco is a community legitimizer,” said Surprise Economic Development Director, Jeanine Jerkovic, CEcD.

And it’s not only the current companies eyeing the market that will positively impact your property’s appreciation, but also ones the prospects wanted by the community. Search for a recent community survey to get an idea of what types of concepts the residents would be responding to.

Example: The Economic Development Division of Surprise conducted a 2020 Retail Survey, which received results from over 4,300 residents on what specific retail businesses would be most welcomed. This also concluded that 40.8% of residents both live and work in Surprise, indicating a fair portion of business is in town.

### Check Out Part II!

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