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Here Are the Best Commercial Real Estate Properties to Be Owning Right Now
By Jim Gillespie | February 29, 2012
Trying to predict what will happen with the economy in recent years hasn’t been easy. It appeared several years ago that we were going to see a flood of distressed properties and foreclosure sales hitting the market, but then "extend and pretend" was implemented by our lenders, severely limiting this activity. But as you can see right here in this article I’m linking to, there are warning signs that more foreclosures and distress sales with commercial properties may be on the way.
With so many companies laying off workers, closing locations, and having a more difficult time remaining profitable, it leaves people scratching their heads wondering why the stock market has been performing as well as it has been. But when you read an article like this one I’m linking to here, and you then discover that the total amount of the bailout wasn’t really $700 billion, but more than $16 trillion…more than the entire one-year Gross Domestic Product of the United States, you begin to recognize that throwing this kind of money into the economy will definitely have an impact.
In addition, as I’ve mentioned in a previous edition of my E-newsletter, when you look at the information provided by the people located at ShadowStats.com, you learn that the true inflation rate, as it used to be calculated, is really double the rate that’s been reported to us. You also learn that the true unemployment rate, as it used to be calculated, is really 22-23%. This is what happens when the method utilized to calculate these indices has been changing in recent years.
With so many changes happening behind the scenes, it’s not easy predicting, on an apples-to-apples basis, where everything is headed economically. However, it’s easy to understand that with these approaches being implemented from behind the scenes, they’re not being implemented because things are looking really solid.
Keeping this in mind, apartment buildings are the darling of the commercial real estate industry right now. I’ve read articles and have seen videos of people within our industry discussing this, proclaiming that this is a sign that our economy is finally turning around. But what they’re not telling you is that the demand for rental housing has increased because people have been losing their homes, and they’re looking to rent places now instead. So the increased demand in rental housing has been driven in a big way by the worsening of our economy, and this really isn’t a signal that the economy is turning around.
The lenders, recognizing this trend and the increased demand for rental housing, have been responding favorably, and they’ve been willing to provide more financing for multifamily investments. But they haven’t been nearly as excited about lending on office, industrial, and retail investments.
With companies downsizing, laying off people, and closing locations, office, industrial, and retail investments are a greater risk right now to lenders. But with every single person still needing a place to live, and with more people looking to rent nowadays as compared with just several years ago, multi-unit apartments now represent a safer investment for lenders when compared with other types of properties. In addition, in the absence of all of us experiencing another financial or economic meltdown over the coming months, this will probably remain the same for awhile.
Keeping this in mind, apartment buildings will do better in the near future as compared with other types of real estate investments. But there’s one more criterion that’s extremely important for us to factor in here…
Location.
Investors should own their apartment buildings close to where the greatest abundance of jobs are…which usually means within the major cities. The cost of commuting great distances to work by driving is getting more expensive, and in outlying areas where there’s no public transportation to utilize to commute into the central business district, this will become a big problem. The price of gas right now is already cutting into people’s budgets. But imagine what it will do when gas prices reach $5.00, $6.00, and $7.00 a gallon, which they will definitely do…over time.
When this happens people living within the outlying areas where they have to drive great distances to work, will need to move closer to the central business district. They just won’t be able to afford the cost of gasoline for the long commute anymore.
As this happens, if you own apartment buildings within the major cities, close to where many of the jobs are, you’ll be poised to reap the benefits of this increased demand for rental housing, because your buildings will already be located where a great abundance of renters will want to live.
But here’s a big warning…Owning investment properties within the outlying areas where people must drive great distances to work…is extremely dangerous. As the price of gasoline increases, people will no longer be able to afford driving these great distances to work, and the demand to live in these areas will decrease.
So whether it’s office, industrial, retail, apartments, or land being owned, recognize this changing, underlying dynamic that will be going on, and own properties in areas closer to where the jobs are. No one wants to own properties in areas where the people will start believing that they can no longer afford to live there, because the cost of driving to work, when compared with the amount of money they’re making from their job, just doesn’t allow them to pay their bills.
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