Investment Analysis

Applied Economics

Look at the obvious and not-so-obvious economic factors to achieve better outcomes.

Timing the economic cycle correctly means everything for the success of commercial real estate construction projects and acquisition decisions. Having insight into applied economics and how it relates to real estate is critical.

It is widely recognized that 11 basic sectors comprise the major industries worldwide, including consumer staples, energy, financials, healthcare, industrial, IT, materials, real estate, telecommunications services, and utilities. Among each major sector, more than 50 specific industry groups are derived.

Commercial real estate professionals need to understand those sectors and how their respective industry groups expand and contract independently of each other. To make predictive investment decisions, they also must evaluate the effect of supply and demand, technology supply chain, and the availability of capital.

Industry Shifts

An example of the predictive applied economic analysis approach is the explosion of online orders through Amazon. This has resulted in huge demand for distribution and fulfillment warehouse space worldwide. 

For instance, the Inland Empire region of southern California is one of the leading U.S. industrial warehouse markets, with millions of square feet of warehouse space. Due to strong demand, some speculative properties have been built.

As one of the main distribution hubs to the western U.S., the Inland Empire receives imported goods through the Port of Los Angeles, which is the busiest port in the U.S. Due to the lack of existing warehouse space and infill in the Los Angeles and Orange County markets, opportunities for developers in the Inland Empire have flourished because of good transportation corridors and abundant low-cost land.

Further analysis shows that the increased demand for industrial space also creates the need for more trucking facilities, pallet yards, building supply locations, and equipment leasing yards, which benefit from the increased demand in just one market sector. This example shows how synergistic economic relationships and the destructive effects of expansion are important concepts to understand and take into consideration. 

The destructive aspect of expansion in online orders and technology is the loss of retail jobs and many large retail buildings going dark. Opportunity, however, is created for adaptive reuse of those dark centers. Many malls now house municipal and government entities, pop ups, and even indoor swap meets.

Situational Awareness

Typically, corporate relocation occurs either to reduce costs in prohibitive tax, regulatory environments, or to use incentives other municipalities may provide. For example, California's Farmer Brothers is a coffee company that packages and supplies more than 90 million pounds of coffee per year.

Apparently, the company is leaving California to lower its operating costs and expand to a new build-to-suit facility in the Dallas/Fort Worth area of Texas. According to the Dallas News, Farmer Brothers estimates by moving to Texas it will save up to $20 million annually.

Where does a commercial real estate professional start in the study and analysis of sectors and industry groups to determine demand, over capacity, or an increased need for capital expenditures that would lead to building more space? Start by looking at industry reports and pricing trends in the stock market, as well as tax rates and the regulatory environment in different states. 

An annual report from a leading company in an industry group will reveal vital data a commercial real estate professional could use to understand the expansion dynamics of a firm, as well as the key company officers.

Sometimes trends will be obvious. During the past few years, many companies have moved out of California, for example, to states where lower tax rates, more incentives, and fewer regulations can reduce a company's operating cost significantly. 

Also, the stock market is an anticipatory pricing mechanism where the market will price a stock or industry group based on predictive events projected far into the future. The business cycle and rapidly changing technology will continue to create opportunity for the astute real estate investor and commercial real estate professional.

Nathan Bragg

Nathan Bragg is managing director at RE/MAX Commercial  Division in Rancho Cucamonga, Calif. Contact him at  nathanbragg@remax.net

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