BREVARD COUNTY, FLORIDA – Ten million Americans lost their jobs over the last two weeks. The next unemployment rate on May 8 is expected to be in the
What are the indicators to watch for in the US that the commercial real estate sector is in trouble?
There are several key factors to track, and since there are many different sectors of the real estate market, I will keep this answer on a macro level. I do not think that brokers’ actions of encouraging tenants to relocate, whether this actually occurs or not, is a leading indicator of the market. Rather, tangible economic factors offer warning signals.
The leading metric is not necessarily rents or vacancy, but employment. As long as employment is low, there will be less employees going to work and occupying space. Furthermore, as unemployment persists, consumer spending will decrease as families will have less disposable income. This will adversely affect retail stores to which sales are inextricably linked to their tenancy in a commercial building.
Commercial real estate lags the stock market by several quarters historically, meaning external macro economic forces occur that act as a domino effect for commercial real estate.
In terms of specific commercial real estate metrics, as rents rise and buildings sell well above replacement costs, or when buildings are sold at prices that disregard the actual rent roll or NOI, these are signs that a bubble is forming.
Interest rates and the world economy both play important roles in the respective country’s commercial real estate market as well. As interest rates fluctuate, owners are either encouraged to keep assets or sell. When foreign markets are performing poorly, they will look to invest in core assets in your markets, but the opposite can hold true as well.