A commercial property is first part of a neighborhood like South Fort Myers; then part of a county like Lee County; and still part of a country like the USA – in other words – its value is tied directly to its surroundings. Only with a thorough knowledge of the entire surroundings can a property manager design a management plan and marketing strategy; establish competitive rent levels; and forecast future cash flows.
Variables such as employment, population and income are excellent indicators of economic activity and affect the supply and demand of rental property in an area. The property manager whose opinions are backed by analyses of these variables can judge the highest, best and most productive use for the property over its economic life.
There is a common opinion that in real estate there is no national market, rather the market is a mix of smaller local markets – each different from the next. Since this is basically true, property managers must scrutinize each property in relation to local economics.
However, transitions in the national economy are felt on local real estate market levels and ultimately affect individual investment decisions. For example, changeable interest rates affect all levels of the economy – the federal posture on interest rates and lenders’ attitudes have an impact on regional as well as local markets. Federal tax laws also dictate some investment decisions. Not all national trends in the economy filter down to all local markets. In nationwide recessions, real estate practitioners in some regions actually fared very well, escaping any serious economic setbacks – while those in other areas were not so lucky. Southwest Florida has been resilient to serious recessions, although we are certainly experiencing a correction in market values now.
What does this mean to the property management firm? It means that only a solid knowledge of national economic trends will give the firm’s property managers a complete understanding of their local markets. Federal policies directly affect local market conditions – whether through spending cuts, tax relief or interest ceilings – and the impact of national economic policies has grown.
A regional analysis yields an understanding of the economic activity within an area and (to some extent) the effects of supply and demand on a property. Factors that influence the analysis are population, employment and income. Social and legal characteristics are considered too. Information can be gathered from private agencies; government agencies (like the Bureau of Census) which reports population data by census tract.
The neighborhood analysis serves as a guide for determining a real estate investment’s potential and helps isolate alternatives for achieving that goal.
The regional analysis should take careful note of purchasing power which is influenced by area income levels. Income is the total amount available to the consumer; purchasing power is income less taxes and living expenses or the amount available for nonessential goods, services or savings. Purchasing power has the most direct effect on property value.
Other factors that are analyzed would be:
• employment trends
• the region’s financial stability
• transportation and public improvement
• recreational and cultural facilities
• educational facilities
• legal and governmental characteristics
Finally, the general real estate supply and demand conditions within a region warrant the property management firm’s attention. The property manager should be able to project the number and volume of real estate transactions; average prices; interest rates and rental rates; and attempt to forecast trends. He/she should examine current supply; volume of construction and the distribution among property types; rent levels and ranges; and vacancy rates by location.
A tight market with few vacancies as we have seen in our local market will lead the manager to different conclusions than a region with high vacancy rates. The manager also should investigate construction prospects. A cutback could be the consequence of rising costs such as impact fees, fill costs, insurance, etc. or it could be caused by a sharp decline in demand.
The need for analysis should be clear. Because real estate has a fixed location, the characteristics of the location become attributes of the property. To a large extent, the value of a property depends on the features that surround it and the forces that affect it, i.e. value is a function of location.