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Commercial Real Estate Cycles

By Expert Author: PIERRE MCLEAN

Commercial real estate cycles are influenced by market fundamentals precipitated by the stability of the financial markets, the actual and perceived robustness of the economy, buoyancy of property classes within the sector, etc; this underscores the factors which are instrumental in determining the performance of asset class. However, the viability of individual properties are primarily local market driven influenced by the forces in the microeconomic environment inclusive of supply and demand, zoning ordinances, building codes, entrance or exit of industries, population shifts, etc. However, macroeconomic forces e.g. a war, recession, instability in foreign economic markets, subprime market collapse, etc are influential in determining the stability and resilience of local markets as their effects filter down to the local level.

Fundamental and supplementary factors are:-

Demand for Space - is characteristic of tenants' sentiment in relationship to the performance of their businesses. The level of optimism associated with tenants operating a growing, stabilized or shrinking business drives the demand for expansion, maintaining current occupancy rate or contraction of needed space. The demand for commercial space is a derivative of where the business is in its life cycle and senior management's governance of a space management system tied to business performance.

Housing Supply - is influenced by macro and microeconomic factors which effectuate the performance of the economic environment, business environment, demand for housing, etc. Consequently, if conditions warrant an increase in construction to satisfy the demand for additional real estate to be put online, it will occur in response to the market. Being there is a time delay in the developmental process from concept through project completion an oversupply sometimes results as multiple developers over saturate the market with their respective parcels of real estate. This leads to supply exceeding demand and the equation shifting with an imbalance of excess supply in relationship to demand.

Population Characteristics - influence real estate cycles through demographic makeup which are determinants of family structures, disposable income, desired housing, community amenities, etc. Population shifts can affect where are the hot spots for real estate acquisitions and developments and the market prices.

Social Attitudes - determine if markets are pro real estate or anti real estate from a developmental standpoint. Some communities desirous of maintaining their autonomy and historic identity are resistant to the construction of new real estate and even industry, e.g. Home Depot. Conversely, there are communities that embrace progress and create an environment with incentives to attract new development with its resultant taxes for the community.

Tax Issues - the tax laws in place can be instrumental in creating favorable or unfavorable real estate environments. Tax credits and incentives are attractive to developers if other market factors are supportive of project feasibility.

Business Activities - the performance of the business sector is impactful on the robustness of real estate markets and affects real estate cycles. The unemployment rate and the general confidence people have in the stability of their industry, employers and the economy determine their propensity to invest in businesses, housing, investment real estate and their ability to quality for funding to secure these purchases and/or the willingness to risk capital.

Supply of Money for Financing - the abundance of available money, interest rates, terms, etc can help to expand or contract the real estate market. Developers, investors, homeowners maybe in the market to develop or buy real estate; the money supply has to be adequate with rates and terms that allow an acceptable return on investment to compensate for the inherent risk associated with all real estate investments.

Commercial real estate cycles have factors which occur sequentially and/or simultaneously during the period. Different markets are impacted to various degrees by the factors and their ability to rebound also varies. From an investment perspective, when the market is down and real estate can be acquired at a discount and held until the market recovers, appreciation in value can be captured and/or extracted from the property when the commercial real estate cycle is in an upward trajectory in terms of market value.

Pierre A. McLean is the Managing Member of Commercial Mortgage Funding, LLC located in Forked River, New Jersey, a commercial mortgage brokerage firm. He can be contacted at Commercial Mortgage Funding, LLC, 610 Lacey Road, P O Box 202, Forked River, NJ 08731, Tel: (609)971-7171, Fax: (609)971-7144, email: info@bestcreloans.com website: http://www.bestcreloans.com

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