While location matters, other factors have a significant effect as well

Top Factors Influencing Commercial Real Estate Value in 2024

Saturday, March 16th, 2019

commercial real estate value is affected by many factors

Top Factors Influencing Commercial Real Estate Value in 2024

Updated August 3, 2024

Whether investing in a multifamily property, commercial shopping center or office building, industrial property or land, it’s important for commercial real estate investors to understand what a potential investment is worth now – and in the future.

Here are the top 10 factors that can affect commercial real estate value, drive prices up, or drag property values down.

1. Location — But it’s Not the Only Driver of Commercial Real Estate Value

Real estate is about location, location, location. And while where a property is located isn’t the only driver of commercial property value, it’s clearly important.

Five factors that can make a property more valuable based on its location are:

Hard corner exposure – property situated at the corner of a four-way intersection is more valuable because drivers or mass transit riders have more time to look and see the property and its tenants.
Surrounding property – by way of example, a retail shopping center with restaurants and groceries close to large residential areas has a ready supply of potential customers living near the commercial property.
Traffic count – the more cars and riders that pass by the property each day the more ‘free advertising’ the property and tenants will receive.
Vehicle ingress and egress – the easier a property is to get into and out of, along with the ability to make both left turns and right turns, the more user-friendly and valuable the location will be.
Transportation – access to mass transit systems, highways and freeways, auto parking, and green and pedestrian-friendly transportation features such as bike paths and walkability.

2. Interest Rates

Commercial real estate investors use leverage – or other people’s money – to buy property. Interest rates are the cost of credit. When rates are low, credit is cheaper. More money flows into capital improvements and commercial real estate because of higher yields (return on invested dollars) and rising property values. Conversely, when interest rates rise, property values go down due to declining yields from the higher cost of financing.

3. Economic Outlook

The current performance and outlook of the local, regional, and national economy affect the value of commercial real estate. Economic indicators include real GDP, inflation-adjusted wage growth, job growth and unemployment rates, and the household savings rate. When major employers are stable and successful, they attract businesses, professionals, and residents to the area. This increased demand for office spaces, retail properties, and industrial facilities positively impacts real estate values. If a major employer fails or downsizes significantly, it can lead to vacant office buildings, retail centers, and warehouses. These empty spaces reduce rental income and negatively affect property values. The 2025 political change in Washington will also have influence over the economy.

4. Population and Demographics

Population growth through births and migration, age distribution, and education levels also influence commercial property values. For example, an area with a growing number of specialized high-tech jobs might see a rising demand for high-end retail and restaurants. A submarket with an aging population might see more demand for retirement and assisted living facilities.

5. Supply and Demand

The law of supply and demand states that if demand exceeds supply, prices and property value will increase. For example, a shopping center is more valuable if it is conveniently located close to where people live versus being in a business district with little evening or weekend activity.

6. Property Market Performance

Economic outlook, population demographics, and supply and demand – along with new government programs, zoning, and tax laws – significantly impact the performance of individual commercial real estate markets. High taxation and municipalities that are not real estate development-friendly are often cited as reasons why residents and businesses relocate from one area to another. This is evident in the recent influx of companies moving to Texas, which offers a more favorable business environment.

7. Size and Facilities

Commercial property that doesn’t have the functionality to meet the demand of the marketplace runs the risk of becoming obsolete and less valuable to users and investors. Office building owners that don’t provide co-working office space and amenities that today’s tenants increasingly expect. Apartment buildings with a high percentage of one-bedroom units in an area with growing families. Shopping centers with retailers that do not stay relevant with their customer base are are just some examples of ways that commercial property value declines due to changing market demand.

8. Aesthetics and Deferred Maintenance

First impressions are lasting impressions, especially in commercial real estate. Property that has dated exterior finishing, overgrown landscaping, or a parking lot needing to be resurfaced and re-striped is unattractive to tenants and their customers. Tenants won’t renew their leases, cash flow and net property operating income will go down, and the capitalization rate on the property will rise due to a lower selling price.

9. Renovation and Value-add Potential

Commercial real estate that offers buyers the ability to renovate and add value can be worth more to investors than property that doesn’t. Using the above property with deferred maintenance as an example, an experienced real estate investor with available capital for updating, tenant-friendly professional property management, and creative leasing strategies can turn a property around by increasing the monthly cash flow and NOI.

10. How Redevelopment Impacts Commercial Real Estate Value

The redevelopment potential of commercial real estate can also significantly affect its value. That’s because the highest-and-best-use for a property today may be much different than when it was first built. For example, in many real estate markets there’s a rapidly growing need for multifamily residential property. Historic buildings being transformed into modern office spaces, and old neighborhood bars being revitalized into unique restaurant concepts, also demonstrate how redevelopment can significantly enhance property values.

Commercial Real Estate Value Changes Over Time

Commercial real estate is a long-term investment. Successful real estate investors understand the key factors affecting commercial property value both today and tomorrow and how they interact with one another:

Location
Interest rates
Economic outlook
Population and demographics
Supply and demand
Property market performance
Size and facilities
Aesthetics and deferred maintenance
Renovation and value-add potential
Redevelopment potential

While location matters, other factors have a significant effect on the value of commercial property as well.

Government policies and stimulus packages, the growing freelance and entrepreneurial labor force, rising interest rates, users viewing space as a service rather than a fixed asset , and the growing need for affordable multifamily housing are all impacting commercial real estate property values in ways that weren’t seen just a few short years ago.

About the Author

Karen E. Kennedy's expertise spans various areas, including 1031 Exchanges, Delaware Statutory Trust (DST) structured investments, fractional interest ownership, tenancy-in-Common (TIC) owned properties, property acquisitions, portfolio management, and investor relations.

More about Karen E. Kennedy »

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Frequently Asked Questions

What are the advantages of a DST-Structured investment in commercial property?
There are numerous advantages to investing in a DST structured property offering.
- The purchase of DST interests is simpler, faster and does not require as many documents as buying sole ownership of a property.
- Capital Gains are deferred, if investment is for a 1031 Exchange
- No daily property management obligations that come with sole ownership
- Ability to create a diversified real estate investment portfolio
- Cash flow distributions
- Annual depreciation/tax deductions
- Appreciation upon sale of the property
- Upon the sale of a DST property, the investor may engage in a 1031 exchange, even if the DST interest was purchased without 1031 exchange proceeds.
- A DST is a pass-through tax entity, which is not subject to federal income tax, nor to the Delaware franchise or income tax.
- Because the DST is the mortgage borrower, the lender does not require individual DST investor guarantees, nor does the lender require investors to submit personal financial information to qualify for the mortgage loan.
- Investors with interest in a DST property are protected from property liabilities held by the DST. As a result, the maximum pre-tax loss (excluding income tax considerations) is equal to the amount invested in the DST.
Are there a minimum and maximum investment amounts to participate in a DST property offering?
- Yes; $50,000 to $100,000 are typical minimum investment amounts but this may vary from sponsor to sponsor.
- The maximum amount is contingent on the overall size of the DST offering and the discretion of the DST Sponsor.
Are DST-Structured properties commonly used for a 1031 Exchange?

Interests in Delaware Statutory Trusts are the primary investment method for fractional 1031 exchange investments at this time.
Are there any restrictions on a DST-Structured Investment?
- The IRS places several prohibitions on the power of DST trustees if the Delaware Statutory Trust is to be used with a 1031 tax deferred exchange. There are seven restrictions, sometimes referred to as the ‘Seven deadly sins of a DST’:
  - Once a DST offering is closed there can be no further contributions by current owners, new owners, or beneficiaries.
  - Existing loan terms cannot be renegotiated, nor can new funds be borrowed, by the DST trustee.
  - Sales proceeds from the investment real estate cannot be reinvested by the DST trustee.
  - Capital expenditures can only be made by the DST trustee for normal repair and maintenance, minor non-structural capital improvements, or those required by law (such as items related to zoning codes).
  - Liquid cash held by the DST between distribution dates can only be invested in short-term debt obligations.
  - All cash in excess of necessary reserves must be distributed to investors.
  - New leases or re-negotiations of current leases may not be entered into by the DST trustee.
How does an investment in a DST-Structured property differ from an investment in a TIC-Structured property?
- Like TICs, DSTs have multiple investors that purchase fractional interests and the investors share in the total financial performance of the underlying investment property. However, the primary differences between the two investment structures are:
  - A DST is not limited to a maximum of 35 investors required by Revenue Procedure 2002-22.
  - DST investors (Beneficiaries) are purchasing a beneficial interest in a trust and do not receive deeded property.
  - Beneficiaries in a DST are not necessarily required to form single-member Limited Liability Companies (LLCs).
  - Beneficiaries do not have voting rights or operational control of the property.
  - In a DST structure, there can be no cash calls or additional money invested into the property beyond typical maintenance and certain capital expenditure needs, unlike in TICs.
What is a 1031 Exchange?

A 1031 exchange is a swap of one real estate investment property for another in a specific way that allows for capital gains taxes to be deferred.
How a 1031 Exchange is Accomplished?
There are seven recommended steps common to most Section 1031 tax deferred exchange:

BEFORE YOU CLOSE ON THE SALE OF THE RELINQUISHED PROPERTY:

Step 1: Consider retaining the services of a certified public accountant or an attorney with tax deferred exchange experience to assist in planning for an exchange.

Step 2: Engage a Qualified Intermediary, or “QI,” (also called an Accommodator), being sure to name the QI as the principal in the sale of the relinquished property and in the purchase of the replacement property.

Step 3: Sell the relinquished property, making sure to include a cooperation clause requiring the buyer to cooperate with the seller’s 1031 exchange, and instruct the escrow officer or closing agent to order exchange documents from the QI.

AFTER CLOSING THE SALE OF THE RELINQUISHED PROPERTY

Step 4: Escrow closes on the relinquished property, with the closing statement showing the QI as the seller, and sales proceeds from the relinquished property are sent to the QI and placed in a separate segregated trust account.

FAILURE TO SEND SALES PROCEEDS DIRECTLY TO QUALIFIED INTERMEDIARY FROM ESCROW WILL RESULT IN INABILITY TO EXCHANGE.

Step 5: Within 45 calendar days of the close of escrow of the relinquished property the exchanger identifies one or more replacement properties and sends written notice of this to the QI.

Step 6: The exchanger executes a purchase contract with the seller of the replacement property, making sure the cooperation clause is included in the purchase contract, and naming the QI as the buyer of the replacement property.

Step 7: Within 180 calendar days of the close of escrow of the relinquished property, the exchanger instructs the QI to transfer funds to close escrow and sends 1031 exchange-related documents to the escrow company, and the sale closes with the closing statement showing the QI as the buyer on behalf of the exchanger.
- After the replacement property has closed escrow, the QI will send a final accounting statement to the exchanger. The statement will show that funds have come from one escrow directly into another, all without the taxpayer having constructive receipt of the funds.
- Real estate investors should note that although the qualified intermediary is indicated as the seller and buyer on the purchase contracts, the deed and title are always from the taxpayer to the buyer, and from the seller to the taxpayer.
What qualifies as a “like-kind” replacement property?
- The definition of a qualifying like-kind property is very broad, for both the sold property and the replacement property: real estate used for investment or business purposes. Personal use property is not eligible.
- Investment real estate (held for either appreciation or for rental) can be exchanged for real property used in a trade or business. Partial interests such as TICs or DSTs, are exchangeable with other types of real property.
How is a replacement property identified?

A like-kind replacement property is identified if it is designated as replacement property in a written document signed by the exchanging party and received by the QI before the end of the 45-day identification period. Every QI uses their own form of documentation. Please consult with your QI to determine the exact procedure they require.

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Authored By: Karen E. Kennedy

President & Founder • NAS Investment Solutions

Karen E. Kennedy's over-40 years experience spans various areas, including 1031 Exchanges, Delaware Statutory Trust (DST) structured investments, fractional interest ownership, Tenancy-in-Common (TIC) owned properties, property acquisitions, portfolio management, and investor relations. See Full Bio