The Three Indicators on When to Invest in Commercial Real Estate

December 23, 2009
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 Three Indicators That Signal When to Invest in Commercial Real Estate

In the U.S., there are over $800 million in commercial loan renewals are coming due in the next three years. Northern California is one of the most desirable and inelastic markets in the United States, the value of commercial real estate has dropped between 25-50 percent.

Here are three indicators that potential investors should be conscious of when investing in real estate.

* The first is interest rates start to increase. The US Fed has eliminated the cost of funds for banks to borrow from the Fed; this in turn is supposed to positively encourage lending while keeping interest rates for the average borrower to a minimum. This is working, but once the economy is stimulated enough the Fed will increase interest rates to prevent inflation and then interest rates will rise. Rising interest rates indicates the economy is finally on track.

* The second indicator to use to determine if the market is better to buy commercial real estate is if the foreclosure market dries up. Foreclosures and distressed assets are some of the only commercial properties in contract in today’s market. Nationally, the foreclosure market is at its highest rate since the S&L crisis in the 1980’s. Distressed assets need to be absorbed before the rest of the commercial market can thrive.

* The third indicator is that properties are sold for below replacement cost. If it costs $500/SF to build building including land and you can buy an asset down the street for $200/SF, you’re buying substantially below replacement cost. This is a key indicator the market is bottoming out and is a good time to buy

Keep these indicators in mind when investing on commercial real estate.