The problems of real estate are comparable to those of the country. Many problems exist within our country, and within the real estate industry, but the most important issue that affects the value of all real estate is jobs (read NetGain’s “The Driving Force Behind Commercial Real Estate Value - Past, Present, Future”). The importance is underscored by the fact that most other problems can be solved once the problem of jobs is dealt with. Consequently, the most important investor question concerning income property is as follows: What is the current state of employment in our country?

NetGain believes the long term trend of unemployment in the United States is increasing. This has serious implications for income property owners and everyone else involved in the process of buying, managing and selling income property. Following is NetGain’s review of the state of employment in the United State and its implications.

The media continues to bombard us with a potpourri of material telling us that the bottom of the current decline in the real estate industry is close to, or at the bottom. When you combine this outlook with the following three ingredients, it does indeed appear that we could be at the bottom. (1) Mortgage rates, an important aspect of real estate values, are at their lowest range in recent years. (2) In many areas of the country, construction activity has slowed or stopped. (3) Capitalization rates are in a positive spread when compared to current mortgage rates.

The outlook for commercial property values resulting from these three ingredients is that real estate values will continue to trade in a relatively narrow band and successful returns will require more responsive buying, managing, and reporting techniques. Real estate professionals know that the real estate world has not improved. The realities of the three factors listed above are as follows:

1. Lower mortgage rates are offset by the combination of the scarcity of available lenders and stricter requirements.
2. The slowdown in construction has eaten into some excesses, but the process has been slowed by more concerned buyers and investors.
3. Each property has developed two sets of capitalization rates: primary and secondary. The primary capitalization rate is the rate at close of escrow. The secondary capitalization rate is the rate that evolves after lease rollover. Sadly, the secondary capitalization rate is the real rate, and it is more competitive with alternative yields than the primary rate.

The consequence of this dichotomy is a high level of anxiety both in and out of the real estate industry. This anxiety is expressed through the most frequently asked question: “When will real estate values begin to increase again?” Given the conditions just described, the real question should be: “What will it take to increase real estate values?”

The single most influential factor that will affect the value of real estate can be summed up in one word – jobs. Whatever the location, amenities, mortgage, etc., real estate values will run pari passu with the number of jobs available. If the purchase and management of real estate are performed satisfactorily, and if jobs in an area are stable to increasing, then real estate values will increase. If jobs in an area are declining, then real estate values will decline.

Why are jobs so important to real estate values? First, what is real estate? Real estate is a business that buys, sells, or leases square feet. These square feet provide a place for people to live (housing), work (commercial), and shop (retail). An environment with a strong employment base breeds consumer confidence, and creates more spendable dollars.

A strong employment base strengthens the economy thus creating an increase in the need for real estate which affects:

Commercial real estate by:

1. Filling office buildings, factories, industrial parks, etc. with employed people, thus creating higher occupancy rates.
2. Eliminating concessions and rental discounts.
   Reducing the lessor’s burden of tenant improvement cost.
3. Lowering leasing commissions on lessee rollover.

Increased consumer confidence and additional spendable dollars will affect:

Residential real estate by

1. Encouraging the purchase of residential housing.
2. Materially reducing the doubling up of rental units.
3. Lowering delinquencies, evictions, and legal expenses.
4. Reducing leasing commissions and other marketing costs.
5. Reducing concessions and rent reductions

Pages: 1 2 3