It??™s a good time to be a commercial real estate investor. A very good time.
Some of you might recall the commercial real estate boom of the early 1980s. Chances are, we also recall the fact that the massive overbuilding that resulted from that boom took most of the 1990s to correct. Now we seem to be in the midst of another commercial building boom that could carry us through the next several years, and it shows no signs of slowing down. What??™s the difference this time around? How do we know that history won??™t repeat itself and turn this boom, too, into a bust?
First of all, let??™s take a look at the numbers that are occurring right now. Since early 2004, the cost of purchasing most commercial properties has skyrocketed. The price of apartment buildings, on average, has risen about 25%; retail properties have risen 15%, and even the ubiquitous office building has gained in value by about 5%. While it might not sound like much, over the course of a year that is a pretty significant increase. And it??™s happening in cities all over America.
In Seattle, many downtown areas are being snapped up like hot cakes by huge commercial retailers like Nike and FAO Schwarz, who are eager to move into freshly zoned properties and untapped locales. In Miami, where approximately half of the commercial properties sold are being bought by private residents as opposed to large investors, the demand is mostly stemming from the need for housing. Condominiums are shooting up all over the city in an effort to house the growing population, and it??™s having the side effect of lowering costs as the buildings compete with one another for purchasers and tenants.
But why, all of a sudden, is everyone so hot to build commercial? And how do we keep this boom from ending as it did in the 1980s?
First of all, we must understand that a commercial real estate boom today is a far cry from what happened in 1980. Back then, there was more than enough capital to go around, and many laws regulating the building of commercial properties were in flux. Changes in permits and zoning laws left impatient builders all over the country to either build without the required clearance, or wait for the paperwork and end up losing their rights to those who jumped the gun. As the mid-80??™s approached and the economy slowed, there weren??™t enough businesses- or willing tenants- to fill all of the retail and apartment space that had been created, and all over the country vacancy rates on the new developments hit record numbers. Corporate downsizing and bank mergers led to a slump that meant there simply was no money to put people or businesses into the commercial properties we??™d worked so hastily to build.
Nowadays, things are different. Since we seem to have only just recovered from the 1980s building frenzy by the close of the 1990s, it??™s been awhile since new property has been built in many commercial zones. The economy has rebounded to the point where the capital is available with which to build, but due to space constraints and stricter zoning laws, it will most likely be used much more conservatively than it was the first time around. Basically, the commercial real estate market hasn??™t been over-saturated yet, and conditions today will most likely prevent that from happening. With the advent of thousands of entrepreneurs, .com companies, and the constant growth in population- all of whom require housing- there are still more buyers than there are buildings. And as long as demand overwhelms supply, the market will continue to boom.
Regardless of current conditions, many investors both large and small have spent the past six months selling off heaps of commercial real estate and investing their gains into other types of property. This makes sense- if you have commercial real estate that you don??™t need, there??™s no better time to be selling it off. But if all the investors eventually follow this lead, the boom won??™t bust- it will wear itself out gradually and quietly. Which is, of course, the best way it could possibly happen.
InvestorFortune.com brings real estate investment ideas, strategies & techniques thru home study courses, tele-seminars and live-seminars to real estate investors nationwide. To register for your free real estate class visit: http://www.investorfortune.com/signup.html