What the major metropolitan markets aren’t showing you
If you watch the news, it can give you a false impression of what the real estate market looks like. It’s not because the news is reporting false information, it’s because they’re mainly reporting on limited information. If you only pay attention to the major markets – New York City, Los Angeles, Chicago, Miami, and Houston – you’re going to get the impression that commercial real estate is in a downward spiral. The news isn’t covering what the CRE prospects are in growing cities, like Durham, NC. At this moment, the market for office and retail commercial real estate in Durham is very brisk. How could this be? If you look at these two main factors, it’s easy to see what’s behind this upward trend.
In real estate, there’s a lot of talk about “value add” when it comes to property you own, whether it’s a residential or investment opportunity. In residential real estate, you may add value in upgrading your home, but when seeking out CRE investments, The first step is actually not looking for what the market wants. The first step is identifying what the market needs. Once you’ve identified what the market needs, then you find a product you can modify to fill that need.
You can also think of it this way: if getting into CRE investment puts you at a poker table, you want to be the dealer, not the gambler. Why? The house always wins.
There are more growing cities in America with rampant real estate opportunities in the commercial sector that are being overlooked due to the bias being perpetuated by the news centering around those five major markets I mentioned previously. Lucky for you, you’re here. Now, there are two major trends in commercial real estate here in Durham that are being replicated on a national level. What you do with this information is up to you, but I recommend that you invest accordingly.
A lively workforce wants a one bedroom one bathroom home. How do I know this? A downtown region of a growing city with all the nightlife, restaurants, and bars, needs employees to work there. Those employees don’t want to commute very far and would ideally like to be able to afford to live in the city they work in. Now, pair that with these facts:
- The average household size in America is 1.8 people.
- The largest group of people getting divorced are over 60 years old.
- The population, by and large, is getting a later start in creating a family of their own.
Does that sound like a three-bedroom-two-bath want or something more amenable to a home that’s a bit more low maintenance?
I sat on the mayor’s affordable housing roundtable for the last three mayors that we’ve had in Durham. One of the things that we discussed was workforce housing and household formation relative to the population growth in our area. Of the 2,500 or so affordable housing units that the city is planning to build, 2200 of them are one bedroom houses.
Couple that with our second largest demand in Durham: student housing. Converting undervalued apartments that were attractive to students into condos they can potentially own is a more lucrative opportunity for all parties involved. Properties being poorly taken care of have been refurbished by clients of Reformation Asset Management and have suited the wants of the commercial real estate market in Durham. Remember what I said before about adding value? This is value-added at its finest.
AMENITIZED OFFICE SPACES
Forget what you’ve heard about office and retail commercial real estate investments dwindling. If anything, they’re on clearance. Right now in Durham, we’re picking up CRE properties for $400/square foot that used to sell for $900/square foot. Employers are looking to incentivize their workforce to return to the offices. They’re doing it by amentizing their locations. Of course, more people are working from home post-pandemic, but do their homes have everything they want? If you put your office space in an attractive location with added perks like an employee gym, for example, you have a way to attract employees back to the office.
Additionally, people want third spaces between work and home to socialize and meet people. Those spaces exist in the form of restaurants, bars, etc (which connects back to the growing city model I explained in the previous point). Even the most introverted people are eager to socialize and they need buildings to do that in. That’s where CRE comes in!
The opportunities to invest in commercial real estate are easy to see if you can identify what the market really needs. Stay smart and remember that the house always wins. It’s your decision which end of the poker table you’d rather be on.