How Does Commercial Real Estate Valuation Work?
Commercial real estate questions? Here are some important things to know.
The combined value of the residential and commercial real estate markets in the U.S. is over $50 trillion, which is roughly the total market value of the U.S. stock market, according to reports from Nareit, the World Property Journal, and Siblis Research.
With an asset class as large and diverse as real estate, it makes sense that there are a variety of factors on global, national, and metropolitan area levels that drive the demand for real estate.
There are four key factors that influence the demand for real estate, leasing rates, vacancy and rent growth, and net absorption:
The Bank for International Settlements has issued a report on the domestic and international drivers of property price dynamics. The research analyzed six drivers that contribute to the price growth of commercial real estate in developed countries:
While interest rates and inflation are two of the main drivers of property prices in Europe and Hong Kong, GDP has the biggest influence on commercial real estate prices in the U.S. So, in metropolitan areas in the U.S. such as Tampa Bay where the population is growing and the economy is robust, commercial real estate prices should rise over the long term as well.
In fact, that’s exactly what has been happening. Over the past 10 years, GDP in Tampa has increased by about 49% while Tampa office values have grown by nearly 30% in recent years.
With these demand factors in mind, it should come as no surprise that secondary, business-friendly real estate markets in the Southeast are predicted to perform favorably in 2021.
According to the 2021 Office / Occupier U.S. Real Estate Market Outlook from CBRE, the office markets in Tampa, Charlotte, Nashville, and Raleigh-Durham will benefit from relatively resilient demand, lower costs, and persistent demographic and employment growth compared to large urban areas such as San Francisco and New York City.
Class A office properties historically perform well during economic recoveries, benefiting from improving demand, higher rents, and lower vacancy rates.
In Florida for example, the office market is performing exceptionally well in some markets. Metropolitan areas such as Tampa continue to outperform, showing occupancy rates that are 2.5% higher than the 10-year average.
Of course, not all office properties in the Tampa metro area are performing the same. Important criteria for landlord and office investors to consider include building class and amenities, tenant credit quality, length of remaining lease term, along with building occupancy levels and population growth.
Florida is ranked as one of the 10 fastest-growing states in America by U.S. News & World Report and the U.S. Census Bureau.
The state is home to nearly 20 million people, with population growing 1.12% year-over-year. Over the next five years alone, Florida’s population is projected to grow by 6.8%, nearly twice as fast as the population growth rate in the U.S.
In addition to growing fast, Florida also leads the nation in net migration.
According to the Tampa Bay Economic Development Council, between July 2018 and 2019, nearly 610 people per day moved to Florida. In fact, Florida’s net migration numbers account for 37% of the total net migration in the nation.
It’s no secret that more and more businesses and people are fleeing high tax cities like New York and flocking to Florida. CNBC reports that people no longer feel safe in New York City, with the affluent leaving in “busloads.”
As one local businessman explains, “Frankly, there’s going to need to be a reckoning for some of these states, like Illinois and New York and Connecticut . . . They’re going to have to figure out they just can’t keep increasing taxes.”
People can live in other places, and Florida is quickly becoming the destination of choice. Looking at the state tax rates, it’s easy to understand why.
Florida has no individual income tax, has a top corporate income tax rate of just 4.5%, and property taxes paid as a percentage of owner-occupied housing value are less than 1%, according to the Tax Foundation.
Over the next 10 years, southern regions in the U.S. are expected to draw 62% of the household growth in the U.S. Currently, about 40% of the U.S. population lives in the South.
There are several reasons why household growth in the southern U.S. is expected to grow by 50% over the next decade.
A recent Industry Insights report from PNC notes that real estate markets in the South are generally more affordable, are attracting a younger demographic, and offer environments with an easy tax policy and more relaxed regulatory environment.
Baby Boomers are also flocking to the South from colder, crowded cities in the North and Midwest. PNC predicts that these demographic changes will offer lucrative opportunities to commercial real estate investors who are creatively adapting to these long-term demographic trends.
The Milken Institute publishes an annual report listing the best-performing large and small cities in America. Cities are ranked based on key economic criteria including job and wage growth year-over-year, 12-month employment growth, GDP from high-tech, and the concentration of high-tech employment.
The report reveals that Florida is home to 17 of the 100 best-performing cities for job creation in the U.S.:
While Florida is #1 in net migration and home to some of the top cities for job creation, Tampa Bay is the #1 place that people are moving to from other counties within the state. Metropolitan Tampa is currently home to nearly 3.2 million people, with net migration helping the region to grow by nearly 1.7% year-over-year.
According to the Tampa EDC, over 38,400 residents moved to Hillsborough County (where Tampa is located) from other Florida counties, based on the 2014-2018 U.S. Census.
But it isn’t just fellow Floridians who are moving to Tampa. Hillsborough County and Metropolitan Tampa are also attracting thousands of new residents and businesses from across the country.
The top 10 states residents moved from to Tampa/Hillsborough County over the past five years are:
For the second consecutive year, Tampa ranks #3 in the nation for the most migration year-over-year. Between July 2017 and 2018, over 140 people moved to Tampa each day.
Since 2010, Tampa has ranked among the top ten metro areas with the most net migration change, with an average of 43,000 people moving to the Tampa metropolitan area every year. In fact, net migration to Tampa has outpaced other high-growth cities including Orlando, Miami, Austin, Houston, Charlotte, Atlanta, Las Vegas, and Seattle.
Tampa Bay offers everything that residents, businesses, and commercial real estate investors are looking for. The economy is diverse and robust, the population is growing, taxes are low, and the quality of life is one of the best in the world.
Here are some of the many reasons why Tampa Bay keeps growing, according to the most recent Tampa Bay Community Overview from the Economic Development Council.
Stable pro-business leadership, no personal income tax, favorable corporate tax policies, and lower labor costs help keep businesses growing in Tampa:
Tampa Bay is also one of the hottest markets in the country for corporate expansion and relocation. Some of the many companies that have expanded or relocated to Tampa Bay include:
Tampa Bay has been a competitive alternative to the traditional financial centers of New York, Chicago, and Boston for more than 40 years. The metropolitan area has also seen exponential growth in the information technology industry, and is emerging as a leader in the defense and security industries.
The top industry clusters in Tampa Bay include:
Tech-related jobs in the Tampa Bay area were up nearly 28% in the past five years, and the city has been rated as one of the best places to start a career. Those are two reasons why an average of 75% of graduates end up staying in Florida, with a majority in the Tampa Bay MSA:
The convenient geographic location of Tampa Bay within the Eastern Time Zone allows businesses to easily connect with headquarters and target customers throughout North America, South America, and Europe during normal business hours:
Cost of living in Tampa Bay is 3.4% below the national average. In fact, it costs less to live in Tampa than other cities in the south and southwest including Phoenix, Dallas, Denver, Austin, Atlanta, Raleigh, and Nashville.
Tampa’s affordability and lifestyle make it easy for businesses to attract and keep top talent, and for residents to thrive:
Inbound migration, along with business expansions and relocations are keeping the economy in Tampa Bay robust and unemployment levels low even in the middle of a recession.
The unemployment rate in the metropolitan area is down to 5.7%, according to the BLS, and 1% below the national average. A growing economy, along with population and job growth, are also boosting the demand for commercial real estate and office space in Tampa Bay.
The Q4 2020 Tampa Office Report from Cushman & Wakefield reveals that even though vacancy rates have slightly increased and net absorption has decreased, overall asking rents for all office asset classes in Tampa increased 3.5% year-over-year. For Class A office buildings, rental gains reached cycle highs, with 12-month gains in the Tampa-Hillsborough office market up by 5.3%.
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