Understanding the health of our nation’s economy is the first step when preparing for a commercial real estate investment. Sadly, many hopeful investors fail at their endeavors due to a lack of proper foresight and preparedness.
Economic cycles are undoubtedly tied to the success of commercial real estate investment. When you have the timing in your favor, you are likely to garner more return on investment than lacking market awareness. What exactly affects real estate investment profitability? There are some key factors you should know when seeking to carefully manage your investment initiatives.
The main factors we’ll be taking a closer look at include:
- Gross domestic product (GDP)
- Government Policy
- Population / Demographics
Commercial Investment & GDP Growth Rate
It’s important to understand how the economic growth rate positively impacts GDP. A thriving economy results in more rapid GDP growth, resulting in more personal income, business profits, and job positions filled. All this equals the ideal situation for commercial investment. When consumer confidence increases, spending and the amount of new mortgages increases.
On the flip side — whenever the economy is experiencing a downturn, spending dramatically decreases. More consumers are cutting goods and services they would normally splurge on and opting for a more frugal lifestyle overall. There are fewer individuals contributing to the commercial real estate market.
Government Policy Affects Investment Strategies
The hopeful expectation of government intervention during economic downturns doesn’t always deliver the necessary results. When the government pumps an oversupply of financial liquidity into the market, inflation rises.
An inflationary real estate environment causes significant hesitation among investors. However, sometimes government policies provide a mixture of positive and negative impacts on the commercial real estate market.
Federal Tax Policy – More specifically, when looking at the connection between commercial real estate and federal tax policies, there are significant impacts made. Tax policies impact the long-term capital of commercial assets, along with continued investments. In other words, lower tax rates are needed to secure the security of commercial real estate assets.
Tax incentives aimed at promoting commercial real estate investment in underserved areas should be evaluated regularly for effectiveness and maintained or adjusted accordingly. Commercial real estate needs government tax policies that foster vibrant growth, leading to more job creation and community investments.
Population and Demographics’ Impacts on Commercial Value Metrics
Shifts in population and the distribution of individuals undoubtedly have an impact on making good commercial investment decisions.
Some population and demographic factors include:
- Births
- Deaths
- Age distribution
- Education levels
- Migration
For example, we’ve seen a huge shift in migration during the pandemic where individuals, families, and corporations were moving to different states at unprecedented rates. Another example is when parts of the country that are booming in high-tech industries demand more commercial space to accommodate the trend. And communities with a higher number of old age demographics will need commercial properties that provide retirement and medically equipped living facilities.
The commercial real estate industry is a major contributor to our nation’s long-term economic growth and an important source of job creation. As you can see, many factors play a role in its long-term stability for investors.
When partnering with businesses that can guide you in your investment decisions, you set yourself up for a higher rate of return during the ongoing shifts our economy experiences.
Plaza Companies is the Premier Choice of Commercial Real Estate
Plaza Companies is a full-service real estate firm specializing in leasing, management, construction, and development of some of the most innovative commercial real estate projects in Arizona.
Plaza Companies is successfully competitive in the commercial real estate space while remaining compliant with all accessibility needs as a top priority along with all other legal obligations. Our firm specializes in staying connected and conscientious of all emerging trends and laws.
Contact us today to learn more about leasing the right space or anything else we offer!