We’ve all heard “the trend is your friend” when investing in stocks and bonds. The adage also applies to investing in real estate. Consider current and future trends to sustain and grow your investments.
A good place to begin when considering a trend analysis is to determine what demographics are important for your expected holding period. What are the trends for interest rates and inflation? What’s happening with population growth in the area of your interest? What do the trends bode for the future demographics for that area? In other words, who are the shoppers, customers, target audience and tenants? How will demographics change over your expected holding period?
After the applicable variables are determined, it’s time to apply them to a proposed investment. Suppose, for example, you’re looking at purchasing a retail strip center with three tenants in place. It will pay to look first at the strength of each tenant, their lease terms and the expectations tenants will remain in the building during the planned holding period. That analysis must include whether or not each tenant’s business is relevant to the expected change in customer demographics. If the local shopper demographic is primarily a retired clientele, does it make sense to expect sales to grow at the baby store?
An easier trend to follow could be that for long-term interest rates. Economists and the Federal Reserve tell us we’re in a season of rising interest rates. These rates apply to what banks borrow on a short-term basis, and long-term borrowing rates don’t climb as quickly. It might make sense today to lock in as long a term as possible when borrowing for real estate investments so that sharp upticks in interest costs don’t hurt the performance of the investment.
An additional trend to consider involves the age and functionality of the property you’re considering buying. Is the property new enough and designed well enough to work well for its proposed uses for many years to come? Is it free of such environmental contaminants as asbestos, gas and lead? Will the prospective investment remain attractive to current tenants 10 years into the future? How about new tenants? What would it cost to remodel and update the property in five or 10 years?
Property functions change over time. Who knew in 1990 that high-speed internet capability and wi-fi would be prevalent in today’s construction? Are plug-in sites for electric cars part of your development?
Trends continue to evolve. It’s wise to consider these and other trends when making that next real estate investment.