Commercial real estate is a mirror image of the economy, although it is not always quite so apparent. There is usually a three to twelve month lag time. That’s about how long it takes for negative effects on businesses to trickle down effecting real estate values in the very same negative way. For example if office jobs are disappearing then the demand for office space will do the same. I am sure many of you have seen an increasing number of “for lease” signs in front of many commercial buildings over the past year, and now more then ever in the last five years. The office building market in central and northern New Jersey appears to be hurting as they have experienced negative absorption rates in the first quarter. As a matter a fact statistics show that this is the largest degree of negative absorption the market has felt over the last five years.
The industrial market however has not seen the same fate. It actually appears to be experiencing some positive absorption rates in the first quarter. This isn’t hard to believe either. Considering The United States has become a bigger exporter over the past year as a result of our weakening economy and ever so weakening dollar.
The retail market has not statistically felt the same negative effects that the office market has, as consumers are still spending. However, don’t forget about the lag time. Every specific market will be affected different in bad economic times. The housing market is always the first to go and then usually office is after that. If people don’t have jobs they can’t pay the mortgage. Then if offices don’t have business or employees they can’t pay their rent.
Now depending on how quick of a negative economic turn we are experiencing is going to mirror how quick retail space is affected. Although the residential market has soften and declined in many areas it did so progressively. It did not decline at a large percentage overnight. That being said retailers are seeing their profits dwindle little by little as well. In most cases expenses are going up like in the pizzeria business. The cost of wheat and cheese has risen dramatically over the past year forcing restaurants to raise their prices. In return consumer already have less money overall on a statistical level which means they already can afford less and now they aren’t even getting what they are used to for the same amount of money. This is driving people to buy less and conserve more. In return this is negatively affecting the retailers. Many retailers have already begun to see shrinking profits and depending on how long the current “economic crisis” last for it could drive many more out of business as well. And you know what that means if retailers are out of business there are more vacant retail spaces which will drive values down.
So there you have it, the real estate market and economy mirror one another and feel each others positive and negative impacts. So is there light at the end of the tunnel? Visit our blog soon for part two of New Jersey Real Estate and the Economy.
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The majority single family homes in New Jersey are owner occupied, however there are ones which are non owner occupied and are rented. But when the market area does not consist of many single family dwelling which are rented the appraisal in based primarily off of the sales comparison approach.
The majority of commercial properties in New Jersey are rented. Although some property owners do conduct their own business out of a building they own, it is much more common that an owner of a commercial property rents to tenants.
Therefore one of the most important aspects of a commercial appraisal is the income approach and all data collected and analyzed to develop this approach. The income approach is developed using comparable rentals as the sale comparison approach is developed using comparable sales. What a properties market rent is will greatly influence what its value is. When collecting market data an appraiser will select a capitalization rate which is derived from the market. Basically the capitalization rate is a rate of return which investors in the area are seeing as a return on similar commercial real estate investments. When a reconstructed operating statement is developed by an appraiser this capitalization rate is applied to arrive at a value.
The sales comparison approach however is not taken lightly. This approach is just as important as it is analyzing what comparables are selling for, and even more specific what they are selling for on a per square foot basis.
Although rarely an appraiser will come out with identical values for the sales and income approaches they are generally within a close range. Both approaches also serve as checks for one another as a typical investor would buy a property for a certain price with the anticipation of receiving a certain rate of return on his or hers investment.
There are many reasons why one might need to order an appraisal, whether it be for financial, legal, investment or personal purposes. If you are buying, selling or refinancing real estate then it is always a good idea to hire a licensed real estate appraiser to report the market value. This will enable you to make informed real estate decisions using knowledge and market data you might not have had. For most Americans buying a home is the largest purchase they will ever make. Its only logical to hire a professional real estate appraiser to report the market value of a home before you sign a contract to ensure you are not over paying. Likewise if you are selling your home. Having a licensed real estate appraiser report the value of your home before you offer it for sale will give you extensive insight on your competition (similar homes in your neighborhood being offered for sale), recently sold comparable homes, and an overall understanding of the current market conditions. This will help you decide on a competitive listing price for your home which in reality could save you thousands of dollars by expediting the sale of your home. All in all a small investment in a real estate appraisal can go a long way, especially in the current market conditions we are experiencing.
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