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What Dictates Commercial Rent Prices?

The contents of this article do not constitute financial or investment advice. To find a solution tailored to your needs, reach out to our team of commercial real estate professionals.  

Realizing a return on investment (ROI) is a priority for every entrepreneur, and the same applies to those who invest in commercial real estate. If you want to invest effectively, you need to understand the current commercial rent prices and the future worth of commercial properties. This applies whether you are considering an office building, warehouse, multifamily property, commercial shopping center, retail space, or any other type of commercial property.

Such insight will help you maximize your returns by opting for the right property. The factors that affect commercial rent prices lie in three major categories, namely:

  • Economic Factors.
  • Location Factors.
  • Property Factors.

Each of the aspects above has a significant impact on the prices of commercial buildings. Here is a breakdown of every category.

Economic Factors in Commercial Rent Prices

a) Interest Rates

Without a doubt, interest rates are the most significant driver of commercial rent prices. This is because those who invest in real estate use leverage or other people’s money to buy property. Interest rates here refers to the cost of credit. As such, when interest rates fall, credit becomes cheaper. Then, more funds flow into capital improvements and commercial real estate since the yields are higher due to rising property values.

On the other hand, high interest rates lower property values as a result of declining yields from the high cost of financing. In such situations, fewer people are willing to invest in commercial buildings. This causes the demand for the same to fall and, subsequently, the prices.

b) Wage Growth

The most recent and highest annual growth rate in three years is the wage growth of 2.3% by the end of 2018. Growing wages allow individuals/families to have more disposable income, which can encourage them to invest in commercial property. Wages are critical indicators of how cheap or expensive commercial property is at any given point.

Location Factors in Commercial Rent Prices

a) Transport

The quality of transport systems has a direct impact on the valuation of commercial property. That means that acquiring commercial property in an area with a sufficient supply of transportation networks will attract higher yields. Also, in most cases, commercial buildings within a transport hub are in high demand. Potential investors are focusing on capitalizing on the increased foot traffic in such areas. That, in turn, causes the prices of commercial properties in such locations to surge upwards.

Improving accessibility to commercial property centers is possible through the development of transport networks. That is why the prices of existing and new commercial buildings rise follows the improvement of roads serving such properties.

b) Population Growth

Education levels, births, age distribution, and migration are some of the factors that contribute to population growth in a specific region. For example, the demand for high-end restaurants and retail may be high in an area that is experiencing an increase in the number of high-tech jobs.

On the other hand, there will most likely be a surge in demand for assisted living and retirement facilities within a submarket with an aging population.

Property Factors in Commercial Rent Prices

a) Location

Talking about commercial real estate prices without mentioning the location factor is next to impossible. The reason for this is that different locations impact the desirability of commercial buildings. This, in turn, affect the prices of such property. Some of the critical considerations, in this case, include zoning for your nature of business and the location’s accessibility for your target customers as well as potential workers.

A characteristic example, in this case, is a traditional retail property sitting in an area with multiple apartments and where there are few restaurants to serve the residents. Hotel operators will be competing for that commercial space, which will increase the price of the latter.

b) Potential for Development

The possibility of developing a particular commercial building further can push its price upwards as well. That is because the highest-and-best-use for such property in the future may be different from the initial design. For instance, the demand for multifamily residential property is growing in many real estate markets.

As a result, you are likely to see the redevelopment of obsolete shopping centers into higher density residential housing and the conversion of warehouses into live-work spaces.

Other Factors in Commercial Rent Prices

a) Credit Scores/Financing/Rates

Low-interest rates do not suggest that every borrower can access the same when buying or leasing commercial property. The creditworthiness and credit history of an individual or business are worth considering in such situations. If your credit ratings are low, you will most likely pay higher interest rates, which means that you’ll end up paying more in the long-term.

That ultimately makes purchasing commercial property more expensive.

b) Sale Or Leasing Method

The way someone chooses to sell or lease their commercial property will affect the overall price of such property. Additionally, the time and effort it takes to promote a specific commercial property will impact its price. Some of the approaches used to sell or lease properties include trades, auctions, leaseback, or exchanges – each of which come with their own unique costs.

c) The Urgency to Sell Or Rent Property

The speed with which a property owner wants to sell an asset or find a tenant will dictate commercial rent prices, too. For example, if a property is taking too long to offload, its owner can decide to take a lower offer to speed up the sale. If there is no urgency to sell or lease a particular commercial building, one may opt to hold out and wait until they find a match for their valuation.

If you’re interested in renting a commercial property for your needs, reach out to us. We’re happy to help you find what you need.

 

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