PART I
You’ve heard the saying, “retail follows rooftops,” but how else can you forecast potential appreciation before purchasing that commercial property?
Simply put, you make money through CRE by obtaining cash flow, appreciation, and principal buildup through paying down the loan. Regarding appreciation, most commercial property will appreciate if appropriately maintained and its market doesn’t take a dive.
These questions will provide insight into the investment’s projected appreciation and help you decide how long you want to keep the property.
WHICH AREAS OF THAT AREA ARE CURRENTLY IN DEMAND FOR LAND?
Is the annual volume of land transactions in that market increasing? Properties are typically held if there is a high demand for building space (also known as a high-appreciation area). As a result, market rents rise. Examine the current rents to get a sense of the area’s demand.
Furthermore, rather than relying on comparable sales or the building’s replacement value, the income approach will provide a more accurate picture of the building’s future value because it considers the amount of income it generates.
Another consideration is whether the existing infrastructure can meet current demand. Or, how much money is set aside?
For example, because Surprise, Arizona, already had the excellent infrastructure, a new master-planned community, Village at Prasada, was able to capitalize on its proximity to Loop 303.
HAS AN INCREASE IN MIGRATION TO THE AREA (YEAR OVER YEAR)?
Look into the number of people who have moved to the area in the last three years. What is the projected annual growth rate?
Surprise is the second-fastest growing municipality in the Phoenix metro area, with a projected growth rate of 2.7 percent in 2020.
Aside from the numbers, learn why people made the decision and what factors influenced them. It may be the optimal cost of living—a business-friendly environment, the weather, or something completely different.
Examine current trade area maps to see if there is much pent-up demand — and if the city can handle more demand as is.
WHAT IS THE CURRENT AND PROJECTED GROWTH OF THE HOUSING INDUSTRY?
In addition to taking the number of planned housing units for the market into account when determining a property’s potential appreciation, obtain a complete residential overview.
For example, a residential overview for the Village at Prasada project pinpointed the locations existing and active. It proposed communities and significant employers so we could see what to expect in the coming years.
Furthermore, how many building permits were issued in the previous year?
For example, Surprise has issued over 780 single-family permits in the last five months.
The sale-to-list ratio, or the difference between the median listing and median sold prices, is another indicator of housing growth. What is the year-over-year trend?
For instance, in February 2021, homes in Surprise sold for roughly the asking price, resulting in a sale-to-list price ratio of 100 percent for that month. The start of the first quarter of 2021 is described as a seller’s market with more demand than supply.
ARE BUSINESSES ATTRACTED TO THE AREA?
Last but not least, the aforementioned “retail follows rooftops” alluded to businesses’ interest in being in the area.
For example, “The Loop 303 Corridor” in Surprise has gained noticeable traction, with the opening of a new Costco location fueling the desire of other businesses to consider the area seriously.
“Costco is a community legitimizer,” said Jeanine Jerkovic, CEcD, Director of Economic Development in Surprise.
Not only will the current companies positively eye the market. It may have an impact on the appreciation of your property, but it will also have an impact on the prospects desired by the community. Look for a recent community survey to understand the concepts to which residents would respond.
For example, the Surprise Economic Development Division conducted a 2020 Retail Survey and received responses from over 4,300 residents on which specific retail businesses would be most welcome. It also concluded that 40.8 percent of residents live and work in Surprise, indicating that a significant portion of business is conducted there.
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