COMMERCIAL REAL ESTATE
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The commercial real estate sector’s predicted five-year CAGR over the next five years is optimistic. The industry is massive and involves more than half a dozen sub-industries developing, managing, valuing, buying, leasing, selling and investing in residential, retail, office, hospitality and industrial properties throughout a multi-family environment. With a range of activities covering the spectrum of real properties, the performance of the industry relies heavily on corporate activity and tends to follow global economic performance.
In 2020, direct investment in commercial real estate totals US$762 billion for the full year, which fell by 28 percent in 2019. A strong performance of US$ 267 billion (up 65% in the third quarter of 2020) helped mitigate the overall decrease in the fourth quarter. The relative strength of Q4 was driven by a robust recovery in American and European activity of the Big 3. The increase in investment volume caused a further deceleration in the quarter: -21% compared to -41% in the third quarter of last year and -50% in the second quarter of 2012.
Commercial immobilization is one of the key tangible barometers for monitoring the health of the region/country economy. Commercial real estate activities are a leading indicator of expected expansionary activities by businesses due to the ever-changing landscape, with cyclical changes. For example, the purchase/leasing of business space in developing economies by large firms such as Apple Inc. is a sign of the company’s future redistribution/expansion of its activities.
Commercial property ownership and leasing had previously been a mother and a pop business before advanced/qualified investors began to view it as an abnormal/extraordinary long-term asset class. The success of the commercial property sector was driven by the opening of capital market activity for real estate via investment vehicles, such as REITs and stock market REOCs and through innovative products, such as commercial mortgage-backed securities, etc. In the last 50 years or more, these initiatives largely financed the construction and management of commercial immovables.
The health of the economy is a major factor affecting the value of property. The measures criteria include economic indicators such as GDP, data on employment, the activities of the manufacturer, inflation, fluctuations in exchange rates, interest rates, mortgage rates, etc. If the economy is slower, the health of the property will be affected. The cyclicality of the economy, however, may have different effects on various types of property. Revenues/returns in the hospitality sector are more vulnerable than office space during economic downtime, as office spaces are protected by long-term leasing and other cases by outright purchases. Hotel occupancy cycles are very short and, as compared with the real estate sector, a significant loss/failure of revenue is achieved in the hospitality sector.
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