Now that the first half of the year is behind us in commercial real estate, let’s take a look at what the future may have in store for us. Keep in mind that one of the most important determining factors in how any commercial real estate market is doing, is how the local economy is faring within that market. Areas like Houston and other places that are dependent on solid oil prices for the state of their economy have been met with continued difficulties so far this year, while other areas like the San Francisco Bay Area have been on fire. With this in mind, there’s a solid chance that higher oil prices will be returning once again someday, and it’s really just a question of when. Keeping this in mind, this could be a good time to invest in those areas that are being dramatically impacted by the lower price of oil.
The cap rates on investment properties, particularly on multifamily properties in many areas, have been driven downward. Which means that you really need to ask yourself the question, “If I buy today at this low cap rate, should I expect that the cap rate is going to be driven down even lower, resulting in even more increased value in my property?” This is an extremely important question to be asking, because you don’t want to buy a property when the cap rate is at or near its bottom.
If you own properties that you’re renting to companies, what does the future look like for these companies? We live in an era now where things are constantly changing very quickly in the business world, and companies that have done well in the past may now be struggling, or they may go out of business in the future. So the more diversified you are in the kinds of business tenants that you have in your buildings, the safer you’re going to be. But at the same time, if you’re dependent on tenants from one specific industry for the majority of the income from your buildings, you’ll want to do your homework and find out how these tenants, and their industry in general, are doing nowadays financially.
Do you remember when one hour retail photo development businesses were on fire as being the entrepreneurial wave of the future? No one saw digital imaging, mobile devices with cameras in them, and the ability to print your photos at home on the horizon.
But if you don’t remember, just ask Kodak.
We live in a time now where we need to be proactive in learning more about what’s coming on the horizon, to both protect ourselves and our investments, as well as to find good new investment opportunities, too. It wasn’t that many years ago that someone could build a new building, sign a 10-20 year lease with an institutional-grade tenant, and then not be concerned about potentially having a functionally obsolete building on their hands at the end of the lease. As things continue to evolve faster and faster in the business world, and technologies are constantly changing, more attention will have to be paid to matters like these. But if you think that things have already been changing rapidly in our lives, fasten your seat belt, as the pace of change is only going to be accelerating, and the commercial real estate investors who embrace this change and get out in front of it will be the ones reaping the profits.