The commercial and residential real estate markets are two different animals. Commercial real estate relies on valuation based on the performance of the business while residential real estate relies on the performance of the market, or what the buyer is willing to pay and can afford to pay.
We’ve heard for years now that the commercial market would bounce back much later than the residential market. And if you understand the fundamentals of the commercial market, you’ll understand why this makes perfect sense.
What has held the commercial buyer back over the past several years has been their ability to sell their home in order to have the funds to buy a lodging business. But with indications of an improving economy and growing consumer confidence, the lodging buyer has been more successful in selling their home in the past year, more or less, and is now ready to push full steam ahead on the next step in their plan. Buyers have accepted the “new today” and realize that their assets are worth what they’re worth, and in all likelihood they’re only going to get better. Some have decided to reinvest their 401k’s or retirement funds by a self directed IRA or something similar and are in a position to move forward now rather than wait.
When a commercial property sells, the gross revenue multiplier (GRM) and cap rate are considered. We take the sale price and divide it by the gross revenue (without sales tax) and come up with our GRM. We take the sale price and divide it by the net operating income (NOI) and come up with our cap rate. As buyers are willing to pay more and more, these indicators will slowly improve over time.
This might explain why I’m working with more buyers right now than I ever have before….and I’m ready. Bring it ON!
