9 Fun Facts About Commercial Real Estate

[Melissa Haworth]

Commercial real estate is a significant driver of economic growth and investment returns worldwide. Data from IBISWorld shows that the market size of global commercial real estate by revenue was $992 billion in 2020. In fact, the industry has been steadily growing since 2019 but was hampered due to the COVID-19 pandemic.

Commercial real estate exists specifically for business or income-generating purposes. Such properties, which could be anything from an office building or residential property to a warehouse, usually generate profit through capital gain or rental income and some other means.

If you’re interested to learn more about commercial real estate, here are some facts about this industry in the US:

1. The average return on investments is around 9.5%.

As mentioned, commercial real estate investment returns usually come from rental income and the property’s long-term value appreciation. It’s different from calculating the exact investment return amid a diverse market and volatile market conditions, but on average, commercial real estate returns are around 9.5%. Meanwhile, some real estate investment trusts yield up to 11.8% returns.

2. Many real estate investors use the 1% rule.

Real estate investors use the 1% rule to measure the price of the investment property against the gross income it will generate. In case you didn’t know, the 1% rule tells investors to multiply the price they bought a real estate property, plus everything they’ve spent on repairs, by 1%.

For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price. The measurement may have been an enormous help to many real estate investors, although the current real estate market may make the 1% rule unrealistic.

3. Multi-family properties win big.

A multi-family home is any residential property containing more than one housing unit, like a duplex, a townhouse, or an apartment complex. According to Moody’s Analytics, multi-family properties are currently the highest-performing asset classes. Multi-family owners and investors are not immune to cost increases but can adjust rents annually or sometimes monthly to account for market changes.

4. Properties have three different classes.

Commercial or investment properties can be divided into three different classes. Class A properties are the premium properties that charge higher rent in exchange for being in a more commercial location and having a high-end look and furnishings. Class B properties are mid-tier and don’t offer the premium amenities of Class A properties. However, these properties have more benefits than Class C properties. Meanwhile, properties belonging to the Class C group are low-rent, functional ones that offer fundamental benefits.

Commercial retail properties include stores, restaurants, and other retail establishments. Industrial options include factories, warehouses, and vacant lands. Office options include commercial office buildings. Meanwhile, other unique commercial property assets include self-storage, those utilized for elder care, and hotels.

5. The market could grow by over $260 billion in less than five years

The global commercial real estate market is subject to rapidly changing industry demands and preferences. The commercial real estate market in the US is estimated to grow by $260.37 billion from 2022 to 2027. The market’s growth momentum will rise at a compound annual growth rate of 3.3%. Return on investment can vary by property type, so ROIs might work out differently for a multi-family home than they would for an apartment building or an office building.

In the US, commercial real estate has a low market share. The competition among providers may continue to drive market pricing and contractual terms, creating aggressive leasing scenarios.

6. Colorado and Texas are both investment-friendly states

Colorado has become one of the most profitable states regarding commercial real estate. The state is vital in the business fundamentals for real estate, with a population growth of a good 8% within five years. On the other side of the map, Texas provides new commercial real estate investors with opportunities to try their luck. Houston, Dallas, and Austin all give confidence to investors to build up their portfolios in the state, all thanks to their growing population growth.

7. Job growth has a huge impact on commercial real estate

Believe it or not, job growth is among the most significant factors affecting the commercial real estate market. More job growth means greater demand for commercial space. In fact, the internet and the rise of online shopping have been a sustaining negative factor on commercial real estate. It’s also important to remember that demand for affordable and workforce housing far outweighs supply.

8. Many millennials as real estate investors

A recent survey from Harris showed that 55% of millennials are interested in real estate investing. Further, another 88% of surveyed millennials agreed that real estate is a good investment. The survey provides a positive insight into future property prices and the future of commercial real estate.

9. 2023 could be challenging for the commercial real estate market

The US commercial real estate sector is up for a challenging 2023 as the real estate industry, in general, is still reeling from the effects of the pandemic. And despite inflation easing in late 2022, the US Federal Reserve will continue to raise critical rates until it tames down inflation closer to the 2% target. The Fed delivered its seventh and final rate hike in 2022 earlier in December, with another 50 basis points, leaving the federal fund rate in a range of 4.25% to 4.50%.