7 Data Points to Consider When Investing in Commercial Real Estate

Office investing provides some of the most stable returns available among real estate asset classes.

7 Data Points to Consider When Investing in Commercial Real Estate

Office investing provides some of the most stable returns available among real estate asset classes. The long-term nature of the underlying leases (often 5-10 years) provides office owners with predictable, stable cash flows. Additionally, direct co-investment in commercial real estate is attractive due to its potential to produce returns for investors uncorrelated from public markets, while providing the security of a physical asset.

At our firm, we look for markets that provide residents access to both affordable housing and quality public education – while also having a high quality of life attached to them. We also target diversified economies – cities such as Nashville; Austin; Columbus, OH; Richmond, VA; Raleigh-Durham and Denver – that maintain government, university, healthcare and professional services presence and do not rely on one type of industry to support the metro.

When identifying secondary and suburban growth MSAs – with populations of 500,000+ residents but outside of the traditional Gateway Marketswe make sure to always track the following 7 of the data points:

7 Data Points to Consider Before Making a Real Estate Investment

1) Population Growth (Net Migration*)

There’s no question that a city’s population growth drives demand for real estate. As more people move to certain areas, the need for additional work space will come with it. For commercial office properties, we’ve identified specific millennial trends (ages 18 to 34) as being a strong indicator of future demand.

*Net Migration: Using data from the U.S. Census – and eliminating any fluctuations caused by births or deaths – we’ve determined how many people are moving to or away from each metro area.


2) Job Growth

Where are jobs growing and corporations going? In a post-COVID environment, will large companies rethink moving a portion of their labor pool from high-rent, high wage, high tax states to those locations that offer more value?

When evaluating this metric, we also account for unemployment and average salary. The U.S. Bureau of Labor Statistics finds some of the year-to-year biggest workforce gains are in Orlando, Minneapolis and Des Moines.

3) Wage Growth

Wages have remained stagnant in the United States for decades. According to the Bureau of Labor Statistics, the average American’s real hourly earnings in 2018 dollars increased by only about two dollars between August 2008 and August 2018. Over that same time, unemployment dropped from 6.1 to 3.7 percent respectively, indicating that the strong labor market has failed to put significant upward pressure on wages. Put simply, despite a strong economy, wages gains are largely being outpaced by rising costs. Despite this, three markets to show a year-over-year increase in wage rates were Austin, Raleigh-Durham and Kansas City, Kansas.


4) Access to Quality Education

As millennials begin the family formation process later in life, access to quality education is one of the driving forces behind where they choose to work, live and play. Using data from the sources such as the U.S. News Best High Schools rankings, we determined the availability of quality education by calculating the average college readiness score of all public schools in the metro area and comparing it to that of all the other ranked metro areas.


5) Access to Affordable Housing

A high hurdle to investing in coastal gateway cities is their high cost of housing. Realtors and other trade groups compare home prices to local median income. In the National Association of Home Builders/Wells Fargo rankings, San Francisco frequently scores as least affordable housing. As much as anything, home costs relative to other cities is what attracts real estate investors.

6) Rising Rental Rates

This one is exactly what it says. Increased rent means landlords make more money. Increased rental rates is a clear indication of an area you may want to consider investing in.

7) Discount to Replacement Cost

A sales price below replacement cost is generally considered one potential indicator of attractive pricing for the buyer. We believe that a consistent approach to estimating replacement cost is a necessary starting point in order to evaluate the discount a given price represents. In addition, an examination of the relationship between current rents and replacement rents (the rent necessary to justify new construction) is a helpful tool to estimate the potential for future rent growth.


Our Investment Process:
The 7 data points above encompass the first data points we always look for when identifying a target market. After considering those data points, we then focus on other factors such as employer movement and office relocations, strength of office submarkets, construction pricing, availability of land for speculative construction and institutional capital investment levels.

After considering all of these variables, and we’ve identified a target market, we then seek submarkets that contain vibrant communities led by prominent universities, local governments that are supportive of attracting business and a growing workforce of Millennials. We evaluate submarkets using data from a variety of sources, particularly focusing on evaluation of macroeconomic and microeconomic inputs (including housing market, demographic and economic data), to determine if a particular market meets our investment criteria.

Taking it a step further, within the submarkets markets that meet our investment criteria, we seek to identify the urban nodes that offer the most attractive mix of rental rate increases, absorption, vacancy rates and amenity-rich environments, which are often characterized by high barriers-to-entry (stemming from high construction costs relative to market rents), access to transportation networks, a range of housing options, employment centers, well-regarded schools and retail conveniences such as coffee shops, bars and restaurants.

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Excelsior Capital

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