By Advisor, Ryan McDonald
What do hurricanes, elections, and bank failures have in common? Answer: Each can powerfully impact commercial real estate (CRE) markets in Florida and across the United States.
In fact, a whole host of variables influences both the sale of existing properties as well as the construction of new ones. These include:
Changes in Interest Rates
Interest rates obviously play a pivotal role in shaping the CRE market. They directly affect the cost of financing property acquisition and development. When interest rates fall, borrowing becomes cheaper, encouraging more CRE investment. Conversely, rising interest rates increase borrowing costs, which can dampen investment activity and lead to lower property values.
Hurricanes
These monster storms can inflict severe damage to commercial properties, including structural harm, flooding, and loss of utilities. The devastation often leads to substantial repair costs and long recovery times, disturbing market stability.
Disruptions caused by hurricanes can be significant, with businesses forced to close temporarily or even permanently. This interruption not only affects the businesses themselves but also reduces the rental income for property owners and increases vacancy rates.
After a major hurricane, insurance premiums for commercial properties often rise significantly due to the increased risk. Higher insurance costs can make owning and operating commercial properties more expensive, potentially deterring investment and development in hurricane-prone areas.
Despite the challenges, hurricanes can also lead to market transformations. There may be opportunities for redevelopment and modernization, leading to a higher-value market in the long term.
Elections
Elections often influence the CRE market through policy changes and shifts in economic confidence. For instance, new regulations, tax policies, or economic incentives introduced by elected officials might bolster or hamper market activity.
On the local level, elections can alter markets if the new government passes new zoning ordinances or launches development projects.
Population Growth and Migration
Florida’s population growth has been a notable factor in recent years. A burgeoning population increases the need for various commercial services, such as shopping centers, healthcare facilities, and entertainment values. This demand stimulates the development of new commercial properties and enhances the value of existing ones.
Demographic shifts also influence the commercial real estate market considerably. A growing population’s demand for retail, office, and industrial spaces can increase property values and rental rates. Aging populations shift the focus towards healthcare facilities and senior living spaces, while younger demographics boost demand for urban residential and mixed-use developments.
Stock Market Fluctuations
The stock market’s performance often exerts a measurable influence on CRE. When the stock market is strong, investor confidence tends to be higher, leading to increased investments in real estate. During stock market downturns, however, investors become more risk-averse and often trim their investments – including CRE. This fluctuation can lead to changes in property values and market stability.
Economic Conditions in General
A robust economy naturally fuels demand for CRE. Thriving businesses need office spaces, retail outlets, and industrial facilities. This demand drives up property values and rental rates. Economic growth also attracts new companies to a given region, further increasing demand for commercial spaces.
Of course, economic slowdowns have the opposite effect. Businesses downsize or close, leading to higher vacancy rates and lower rental incomes.
Bank Failures
When banks start failing, there’s a decrease in available credit for CRE investments. Smaller and regional banks, which often have a high exposure to CRE loans, tighten their lending standards or halt new loans all together. This makes it harder for developers and property owners to secure financing. As this lending tightens, the demand for commercial properties can drop, leading to lower property values.
Getting Guidance
Regardless of how events and conditions affect the market, it helps to have knowledgable advisors leading you through the labyrinth of options. SVN | Commercial Advisory Group’s team has worked with clients in all kinds of economic conditions. Getting the right guidance is key.
Ryan McDonald
Advisor
941.894.8677
Ryan.McDonald@svn.com