Every commercial real estate investor wants to build a portfolio of properties that generates a good cash flow and is profitable in the long run. This is one of the reasons why it is important to put the necessary time and energy into your pre-purchase due diligence or CRE analysis. So what is CRE analysis?
What Is CRE Analysis?
Commercial real estate (CRE) market analysis is one of the forms of due diligence conducted on commercial properties. It provides industry professionals and investors with an insight into the ongoing trends. It also makes it easier to forecast the future using the data that the analysis provides.
A CRE analysis takes a number of factors into consideration. These include a wide variety of economic, socioeconomic, and demographic factors within a specific industry. The analysis typically includes indicators such as local employment rates, housing vacancy rates, and the median cost of housing.
Importance of CRE Analysis
A CRE market analysis reveals vital information about a market. Markets, in this context, refer to Metropolitan Statistical Areas or MSAs. Some of the information that can be gotten from a CRE analysis include:
- Information on capital market access
- Local supply and demand
- Market rents, and
- The revenue-generating potential of properties.
CRE analyses help investors to recognize and take advantage of unique market opportunities. They can also be useful to developers and lenders who can use the information they provide to make informed decisions.
Characteristics of a Good Market
Every market is distinct in its own way and there are various factors that investors use as their guiding criteria such as job opportunities available and income levels. However, there are some general characteristics that are common to all good markets:
Net Migration / Population Growth
One excellent metric that helps to identify a growing market is positive net migration. Positive net migration shows that more people are moving into a market than there are people leaving it.
For example, a report by US Census Bureau shows the Cincinnati MSA (Midwest / Cincinnati Northern Kentucky area) has realized an average annual net migration of about 1,035 since 2019. This is a positive figure and it shows that more people are moving in than moving out of this market.
Another important factor to consider is income. This is because job growth may not be sufficient enough. This makes it necessary to understand the correlation between the property, its intended use, and the local income demographics of the market.
For instance, you may have plans to open a high-end shopping mall in a particular market with significant job growth. However, after considering the NOI of that market, you realize that the income cannot support your intended use of the property and it is not advisable to purchase the property.
When it comes to commercial real estate, you must understand that the best markets are markets that exhibit both demographic diversity and economic diversity. From a demographic standpoint, a good market has a strong diversity when there is a good spread of its racial makeup and age. This is common in major metropolitan areas like the Cincinnati MSA.
Considering diversity from an economic standpoint, a good market should be diverse and not rely solely on just one or two industries. Some markets such as Las Vegas and Orlando have just one or two industries like travel and tourism. If these markets are cyclical, the entire market may suffer disproportionately in the event of an economic downturn.
Other markets such as Dallas, Cincinnati, and Atlanta are more viable because of their more diversified economies with industries like healthcare, transportation, financial services, and education. This makes them more stable in the event of any economic downturn.
The best markets are markets with strong market drivers. These market drivers are typically ones that spur population growth, job growth, and income. The best markets tend to have at least one more market driver, if not more.
Market drivers could include the following:
- Major employers like Disney in Orlando and Amazon in Seattle
- Major universities such as MIT in Boston or the University of Texas in Austin
- Favorable weather such as in Arizona, Florida, Colorado
- Major airports like Atlanta
- A large government presence like in Washington DC
Having multiple market drivers can make a market more viable by adding additional strength. A good example is the Cincinnati MSA. This market has major employers like the Procter & Gamble Company and The Kroger Company, a major university – the University of Cincinnati, and even a major airport – the Cincinnati/Northern Kentucky International Airport.
There is often a strong correlation between population growth and job growth. Markets with high population growth tend to have high job growth levels. This stance has been backed up by a 2021 report from WalletHub.
This report shows that there has been a significant overlap between markets with high net migration and the strongest market jobs. The job market in the Cincinnati MSA has been projected to grow by at least 6.2% by 2028.
Supply and Demand
The supply and demand factor is usually unique to each market. In order to make investment decisions, you have to determine the supply and demand for your desired property type. As a commercial real estate investor, you should look for markets that lack a supply of that property type and have a demand to be met.
Buying or selling commercial real estate requires a lot of careful analysis, knowledge, and expertise. Having the services of experts, like Si Vales Valeo Real Estate on board can be very instrumental to the success of the deal. They are experts in market research and analysis, due diligence period, negotiations, and every other aspect of buying and selling CRE, even strategizing the costs of commercial properties.
Frequently Asked Questions
What Is the CRE Process?
The processes involved in commercial real estate are entirely different from that of residential properties. They include market research and analysis, buying, designing, developing, and management.
Are There Other Types of CRE Analysis?
Yes, there are multiple ways to conduct a CRE analysis. This includes property analysis, owner analysis, investment analysis, portfolio analysis, financial analysis, and industry analysis.
The commercial real estate world is a lot more technical than you think. To get a headstart in this industry, having the help of the professionals we have at Si Vales Valeo Real Estate can be invaluable.