TownSpeaks Real Estate Indicators

Residential and Commercial Real Estate Indicators

Residential and Commercial Real Estate Indicators of Economic Health

Utilizing real estate trends to understand the economy is no secret. Given the size and scope of the real estate industry, there is little doubt that a fundamental shift in real estate pricing and sales statistics can reasonably communicate the direction markets and economic health are headed.

Housing starts directly impact home sales, construction jobs and real estate related employment are key metrics used by many economy experts, but there is a great deal more to the picture as we look at how we can use residential and commercial real estate indicators to measure economic health. In fact, we can use residential and commercial real estate indicators to project or predict economic events or shifts in fundamental investment strategies.

Commercial construction and sales are possibly even better predictors of where we are headed financially and, at a minimum, you need to look at a holistic view of the real estate industry. Historically, standard commercial is a trailing indicator following the residential market. As a general rule, commercial follows residential by about 2 years. This isn't quite the crystal ball surprise you were looking for, so let's dig in a little deeper.

Opening an office or expanding offices is a result of how businesses are performing over time. Perform well and the business grows to the point where it expands beyond existing capacity. Through difficult financial times, companies will fire and layoff. These trends, while slower in the commercial arena, almost immediately impact employment and housing which carries much higher volatility.

Businesses are simply more stable and smooth transitioning by their very nature. Commercial real estate is less immediate due to the slower, wider nature of business cash flow versus personal cash flow. So when we see residential real estate go up or down, there is a fairly strong likelihood that commercial will follow in the same direction. By the same token, if we see commercial real estate expand, then we have to factor in the 2 years prior where the market was already in the process of changing.

Once we understand the nature of this complex cycle, then it is relatively straightforward to identify where we are from an economic outlook standpoint. Add to this the historical approximation of a ten-year top-to-top / bottom-to-bottom cyclical pattern and we get a pretty good idea of the economic landscape. It is worth noting however, that current economic and political conditions have greatly destabilized our cyclical patterns to the point where they are less recognizable, but the patterns still remain. To find out why is outside the scope of this article, but we cover it in the newsletter so signup now.

So standard commercial overlaps residential. Another commercial segment is multi-family consisting of 5 units or more per building. This tells us a similar but different story. Apartments fall into the commercial category because they represent rental rather than purchase. If we factor this rental component in with the overall commercial and residential models, we not get a 360 degree view of our economy all wrapped up in the housing market.

Given that we have a relatively predictable model in the real estate industry, we can surmise that the extrapolation of data is relevant and significant enough in weight to apply with confidence as a projection of economic condition. Loosely translated, this means that not only can you use a real estate model as a gauge of economic condition, you can use it as a tool for prognosticating the real estate market itself to determine investment direction and depth.

Real Estate Supply and Demand Curve

Residential, Commercial & Real Estate Supply and Demand

Real Estate Supply and Demand. There are several indicators that can portend the health of the housing market. From this we can derive a sense of the health of the markets in general since housing is a large portion of our economy.

Residential Real Estate Supply and Demand

In the residential world, we are most concerned with the investor category for several reasons. The reason the investor category is so critical is that this segment of the real estate market is the gauge for residential real estate trends. Investors are very sensitive to end user demand and they buy and price homes accordingly. So real estate investors are a primary focus of this article.

Commercial Real Estate Supply and Demand

The second division is commercial. From a real estate supply and demand perspective, this segment is a two-year lagging indicator behind residential real estate as a rule of thumb. So goes the residential market, so goes business which is why commercial real estate has a lag. Well if we know the main indicator of commercial real estate is the residential market, then logic questions why we even follow the commercial market.

There are several key factors in this market that can help us understand more clearly, how deep a trend is but more importantly, the velocity of the trend. How is this possible? In the real estate supply and demand equation, residential real estate is a mass of money based strictly on demand. Commercial real estate is a mass of money based not only on demand, but on demand projected in the future.

Comprised of purchases and leases, commercial real estate is executed by a more 'intelligent' market member. Not that they are smarter, just that they do much more research into projected demand curves prior to executing a purchase or a lease. They are more careful not to extend into a cycle without reasonable assurance that they will be able to sustain both top and bottom of a cycle.

This brings us to our final point, the cycle. Historically ten years top to top (or bottom to bottom), a real estate cycle has a tendency to consistently repeat which helps us trend where we are headed both economically and historically. The challenge lately is that the swings have become more violent and pronounced with a greater dependency on external events on our economy.

TownSpeaks Real Estate US Housing Supply and Demand

This is one factor in globalization, but that is for a different discussion. Additionally, in this discussion we are not factoring employment or economic dynamics as drivers of demand. We are simply delineating residential real estate and commercial real estate to fundamentally understand the correlation between the two.

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