What Commercial Property Markets should the Beginner Avoid?
December 16th, 2013 by Diane Moore
Most of the commercial real estate sectors in the U.S. have shown a gradual improvement in fundamentals. The relatively smaller amount of new space that is becoming available is easily getting absorbed, as the market is gradually gaining the momentum.
It is expected that the economy will grow next year by 2.5% with modest job creation. Assuming that there won’t be any fiscal cliff, the demand for commercial real estate will gradually increase. The biggest friction that remains is the lack of credit, especially among small investors.
Therefore, for those who have only begun their way in the commercial real estate world it will be important to know the markets to better stay away from.
Atlanta is the perfect example of a metropolitan area that has begun to reverse the direction of its growing commercial real estate market in just a few months. Few years back, it had been among the most sought after commercial real estate markets of the US. But, the property prices in the area fell almost by 13.89 %, the eighth largest among the major metropolitan cities surveyed.
However, in the past few months, the median price gain was around 3.27% due to inventory falling by almost 40 %. Still, Atlanta is among least expensive commercial real estate markets in the country, with an average listed price of $ 74.19 per square feet. With growth perspective, investing in Atlanta seems risky.
The average price per square foot here is around $ 72.77. Macon is the ninth cheapest among the major metropolitan areas studied. The average size of houses in the area is 1,800 square feet, which is higher than most. In contrast to Atlanta, the city isn’t a popular destination.
Macon is among the poorest urban areas, with 23.2% of the people falling below the poverty line. Between 2005 and 2010, exports in the region fell by more than 65 percent with employment rates being among lowest in the country.
Commercial real estate in the region was 21st least searched amongst the cities surveyed. The median list price fell slightly last year, but the number of commercial properties available has increased by 1.5 %.
Las Vegas, Nevada
Before the crisis in commercial real estate has begin, Las Vegas had increased property values as the city has experienced a period of rapid growth. However, after the collapse of the commercial real estate market, property values fell by a staggering 60.4% – the second highest decline in the U.S. As a result, the commercial properties listed in the region have the sixth lowest prices in the country with an average commercial property priced at $ 122,900.
Dayton – Springfield, Ohio
Dayton was once an important center of American innovation and production, creating more patents per capita than any other U.S. city. Unfortunately, the decline in the manufacturing sector hurt the fortunes of the city. Several major car factories that drove the economy in the region have disappeared.
In the last year, there has been a 60 percent decline in the exports, while the rate of unemployment remains above the nation’s average. Commercial real estate prices are still suffering in the region. Dayton – Springfield region has the average list price of only $ 104,900, which is the fifth lowest among the cities surveyed.
South Bend, Ind.
South Bend has another low average price in the country. However, the commercial area is very small, with an average property measuring just 1,424 square meters. Northern Indiana region has an unemployment rate that is 22nd highest in the country.
Export value dropped by almost 50%, and the median income is the 13th lowest in the country. This undesirable scenario left commercial properties in South Bend largely untouched. It was 13th least searched online city for commercial real estate, and one among 24 cities to experience a decrease in the average list price in the past year.
The average listed commercial property in Wichita is around 1882 square feet, which is 29th largest in the country. The average list price, however, is only $ 129,900, which is the 11th lowest in US. During the recession, home values fell by 2%, which is one of the smallest declines in the nation.
Unemployment in the region is 7.7%, which is well below the national average. The property is still very cheap in the region. However, the scenario for commercial real estate is still uncertain.
With average commercial property sized at 1940 sq ft, properties in the Indianapolis metropolitan area are among the biggest in the country. But the average listed price of the property in the area, is only $ 133,000, the 13th lowest in the country.
Toledo had been amongst the biggest industrial centers that have faced a sharp decline in recent decades. Poverty and unemployment is very high in the region. The median income is amongst the lowest in the entire nation. Average house is priced at just $100,000.
It has the third lowest rate per square feet in the country, which is only $ 67.02 per square feet. Average list prices fell by 4.31 % between January and February this year, which is the second highest decline among the studied areas.
Fort Wayne, In.
The cost of commercial real estate in Fort Wayne is $ 66.03 per square feet, which is the second lowest in the country. In the last year, the prices of commercial property fell by 2.78 %, which is the fourth largest decline in the country among the regions studied.
Detroit was one of the cities that were most affected by the recession. The city has already gone through severe economic drought. Prices of commercial property are still down by 55.9 % from their pre-recession peaks.
Unemployment in the city has relatively declined in recent years, but is still in double digits, which is amongst the worst in US. In spite of this decline and uncertainty, Detroit is the second most searched one city for commercial properties, which is due to the average price for commercial property in only $ 84,900.
Commercial real estate markets in US that are overvalued
Apart from the declining markets mentioned above, there are few regions that are so overvalued and overpriced that it becomes impossible for a new investor to invest. These are the regions that don’t offer much possibilities of growth making them unsuitable for investors that are new in this business.
Here are 9 markets that are overvalued and costly enough for a new investor to invest in
New York, N.Y.
The average size of the property in the metropolitan New York is only 1,348 square feet. This is the fourth smallest in the regions surveyed. The average price of the property is $ 389,000, which is the eighth highest in the country.
The region is overvalued and the prices are soaring all the time. Prices have risen by 2.4% in the last year, which is the 18th largest increase in the country. However, the inventory available fell by only 0.18 % in the last year, which is the smallest decline in the country. This means that it is getting more and more difficult to sell the property in the region due to high prices and lack of buyers willing to invest.
Santa Barbara – Santa Maria – Lompoc, Calif
In times of recession, Santa Barbara has lost 8 % of its workforce, mainly due to the falling construction industry. Until now, the region is only able to recover 1.9% of the jobs. The average listed price of commercial properties in Santa Barbara is just below half a million dollars, which is the second highest in the country.
Despite all these factors, property values have increased in the region by 11.11% in the last 12 months, one of the sharpest increase in major commercial real estate markets in the country. But, this bubble is likely to burst soon.
Jersey City, N.J.
Cost per square feet in the city area is the fifth largest in the country. The reason behind this is that while the average price is just under $ 300,000, the average size of the commercial property listed here is only 1,000 square feet – the lowest among the major commercial markets studied. The demand for commercial property in the city is very limited.
San Jose , Calif
Unemployment figures in San Jose are around 10.8%, which is way above the national average. The prices of commercial property in the region have risen; however, the possibilities of complete recovery are bleak.
One of the most overvalued markets in US is perhaps Washington DC. Washington, DC, has had a significant period of growth in commercial real estate prices over the past year. Average values of the assets in the Capital Region have increased by 4.17 %, which is the second largest increase in the country. The region has a great economy, which is constantly fueled by the Government. Commercial properties in this region are selling at rates that are astounding 54 % higher compared to the last decade.
The prices in the region are so high that chances of making profits with a new investment seem to be less. In addition, affordability is the major factor to consider for a new investor.
The appreciation in prices has begun to decline as other economic factors are starting to catch up. This can be especially true with regards to the increasing mortgage rates that increase the cost of owning a property to a considerable extent.
Unemployment in Honolulu, Hawaii, is only 5.7 %, which is well below the national average. In Hawaii, commercial property has an average list price of $ 450,000, which is the fourth largest in the country. Lack of inventory has helped to keep the prices high. This makes Hawaii one of the least affordable places to invest for a new investor.
San Antonio, Texas
Commercial property prices are rising in the city because of the boom in the energy industry. The property values across the city have not fallen even after the recent property crisis, so the property here is not so cheap to begin with. The property values have been soaring, however, the rents have gained just 4 percent in the last few years.
Ventura has the sixth largest average list price in the country. Interest in this region has increased significantly in recent years. However, the inventory has fallen by more than 20% in last few years.
Ventura is one of the few major metropolises, where the average age of properties for sale has increased in recent years. This region is also one of the richest in the country with an average income of $ 71,864, which is the fifth largest of the regions surveyed.
Rapid surge in property prices may result in certain markets becoming overvalued. In contrast, properties selling at prices lower than perceived makes a market undervalued. While the commercial real estate sector is taking significant steps towards the recovery, several major metropolitan areas still have a myriad of market fluctuations. Few regions have grown in terms of commercial real estate prices, while others have seen no progression at all.
An improvement in the economy and low interest rates have increased the demand from customers in most markets, lowering the supply and raising the cost. Recovery is now in its fullest force in most areas and a professional commercial broker may help out an investor to select the right area and invest the money wisely.
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