Building Your Business with CCPIA #11: CRE Market Trends for Inspectors

CCPIA (0:12) Hello, here we are again for another Building Your Business. I know it’s February and for most of us, we’ve already hit the ground running for 2024, but I never think it’s the wrong time to talk about the market and to talk about market forecasts. And in order for us to spend time talking about the market forecasts, I think we need to take a pause and look back at some of the experts’ opinions of 2023.

CCPIA (0:42) We need to understand some of those trends that have happened across the country in the entire commercial spectrum. I know for many of us, we might focus on one sector and one sector alone, but it’s important to understand all of the various sectors and all of the various portions of the commercial real estate world that make up what we do on such an important daily basis. And maybe looking at these trends and looking at these sources might help you hone in on a certain skill set that you might need further training from, or you might want to enhance your business looking forward.

CCPIA (1:25) Now to put credit where credit is due, in putting this together, I used a few sources that I found. One is the National Association of Realtors. Another is the CoStar Data Group, and the other is CBRE.

CCPIA (1:39) So with that, let’s look at 2023. Now in 2023, we’re going to start with office space. This is the one sector in the commercial real estate that really struggled last year.

CCPIA (1:56) Office properties were down. There was a reduction in the workforce. The remote worker opportunities really helped dry up. And that office sector saw a vacancy surge reaching 14%. 14% is a great deal of vacancy out there in this marketplace. What that means is there’s a surplus of vacant offices that might increase the change, thus boosting certain types of other businesses looking forward.

CCPIA (2:27)
But right now, we’re going to have to wait and see, and this is going to force all those Lumbergs of the world with their TPS reports to have to search for new positions.

CCPIA (2:39) If we move from office space to multifamily, even though the mortgage rates surpassed 7.5%, multifamily properties continue to show a huge demand, especially in the second half of 2023. It was much stronger than the first half.

CCPIA (2:57) Let’s take a look at a few of the cities and a few of the marketplaces that really showed some strong growth.

CCPIA (3:07) In this slide here, in this graph, you’ll see that the top 10 areas for growth in 2023 over 2022 were New York, Houston, Dallas, Washington, D.C., Austin, Phoenix, Minneapolis, Denver, Charlotte, and Chicago. And you’ll see some of those might have had a little blip going down, but in most cases, all of these showed great potential, especially when you start looking at places like Houston.

CCPIA (3:43) Those are a lot of units being sold, and so it’s certainly stuff to look at and it’s certainly things to consider as you’re moving forward in commercial inspections with multifamily.

CCPIA (3:58) Here’s another way to look at this when you start thinking of where investors are placing their money. It’s interesting that in the sector in 2023, 38% of all investor money was put in multifamily. That is a lot of money, 9% in retail, 12% hotel and resort, 28% in industrial logistics, 10% office, 3% other, but in that 38% of the money invested, you’ll see that overwhelmingly it was 94% apartments, only 2% was single family, 3% was build to rent communities, 2% was housing. So you’ll see here 94% were multifamily. So that’s an important statistic to consider because as we’re considering this growth and as we’re considering where our next year lies, thinking about doing and focusing on multifamily might be the way that you could consider growing your business and growing what you offer to your clients.

CCPIA (5:25) And when thinking about growing your business, I always say it’s like growing my personal portfolio, multifamily commercial inspections is a tremendous opportunity, the statistics can’t lie. And especially if you’re one of those 10 cities, but if you’re not one of those 10 cities, even in any community, if you’re not in multifamily and you’re not familiar with multifamily, then we have a bunch of resources available to you. I want to share a couple of those real quick, if I may.

CCPIA (6:01) So let me share a screen with you real quick about multifamily. And within our website, we’ve got some excellent resources. Here’s our first resource.

CCPIA (6:12) And we’ve got an article here that we’ve written that’s strictly about inspecting multifamily properties and helping you understand the differences between the different types of multifamily properties, creating your plan, looking at some of the restrictions, how to begin the inspection and effective strategies. And then a little bit of information with a mock inspection.

CCPIA (6:42) If you’d like to go beyond that, then we have other resources. We have a resource that is strictly designed for building out and understanding how to organize a multifamily inspection. You’ll see in this resource here, again, on our website, free for all of our members, obviously, is talking about the two different types of reporting styles. This is organizing your report. We’ll talk about cumulative and summary. We’ll talk about some pros and cons and which is better. And so that’s an excellent resource for you to share.

CCPIA (7:26) And then lastly, we have an excellent resource about the fee structure. And in dealing with fee structure, it’s really an important step because you have to understand if you’re going to do the multifamily inspections, how to charge. Couple different ranges, couple different methods. So don’t be afraid to look at the resources that we have available to you because we do have a tremendous amount of resources that are at your disposal and are completely free.

CCPIA (8:06) But there’s one more resource I wanted to talk about, and that is during this year’s October Pro Inspectors Convention in Orlando, Florida, which is an InterNACHI event, not a CCPIA event, but we’re pretty much locked in step and one in the same. During this convention, October 10th through the 12th, there is going to be a session strictly presented on performing multifamily inspections.

CCPIA (8:44) And in multifamily inspections, I’m going to go through and we’re going to do a little bit of a mock inspection, but we’re going to talk about the entire process. So if you’re looking at multifamily inspections, I know this is later in the year, but this is certainly an opportunity for you to gain and garner a much stronger philosophy and much stronger interest in that multifamily inspection.

CCPIA (9:13) Moving on. Retail properties were certainly a part in any conversation in 2023. Within retail properties, it was a little bit slower than expected, and it did outperform what they thought was going to happen, but it’s still in that – it still had vacancy rates drop down in the 4.1 range.

CCPIA (9:41) I wanted to show – this was very interesting to me when I looked at these statistics. And what interests me the most on this was the net absorption type. And so when I look at this, and we’re looking at 2015, 2019, and 2023, you’ll see that general retail has been dropping or being absorbed this whole time.

CCPIA (10:11) Mall spaces almost become nonexistent, those big, gigantic mega malls. But what’s increased since 2019 were neighborhood centers and power centers and a little bit of an uptick – not much, but a little bit in the strip centers. And so that’s exciting, because as you can see, we’re moving from the big mall space into the neighborhoods.

CCPIA (10:39) And so for most of us, that’s great news, because we might not be the ones that are going to get called for those big, gigantic half-a-million, million-square-foot shopping plazas, but we’re going to get called for those 25,000 to 50,000-square-foot neighborhood centers. And so I find this to be excellent news for us, because it falls into our scope, and it falls really into where our comfort zone is.

CCPIA (11:11) But for me, my personal comfort zone for the last 20 years has been industrial. I loved, loved doing industrial inspections. And the reason I did is they were giant boxes, they were fairly non-sophisticated, non-complex HVAC systems. And so it was things that I could do as a one-inspector or two-inspector shop, and I could do a half-a-million-square-foot a day and just be very profitable.

CCPIA (11:49) So in 2023, industrial was, again, the standout for all commercial space. It’s great because, again, between industrial and multifamily, that made up 90 percent of my commercial daily activities. The rent in those spaces was able to rise about 6.5 percent, 6.6 percent to be exact, compared to 2022, but the vacancy rates started dropping.

CCPIA (12:19) And so I want to show you a table to help reinforce that. And so in this table, you can see that we had great growth. We had growth in Dallas, Chicago, Houston, Phoenix, Indianapolis, Kansas City, Columbus, Savannah. Savannah had a little bit of a drop, but it was still outperformed so many other places, Charlotte and Philly. And so, again, this analysis is fabulous because it says it’s still on the rise, we’re still growing, and you might want to look at your marketplaces and see if you could deep-dive and understand that a little bit further.

CCPIA (13:06) And so when I start thinking about deep-diving, and I’ll put these links on our notes that are listed below us, but the NAR has produced some really excellent resources for us. And I’m here at the National Association of Realtors, and they actually have a commercial real estate metro market report, which allows me to deep-dive my marketplace even further than some of the larger abstracts. And so if I go to Colorado, I’m able to take a look at the specific statistics that I’m looking for in my state. So when you’re looking at doing research, you’ve got to know where to go.

CCPIA (14:03) I will put this link in our notes and in our comments below, and so feel free to look for those. But I would really encourage you to do as much research as you can. And that’s going to help you. It’s going to help your budget. It’s going to help you grow what you’re planning on growing in your marketplace for 2024.

CCPIA (14:25) So now that being said, let’s start looking at a little bit of what they’re producing or predicting for 2024.

CCPIA (14:32) I think in office space, from everything I’ve read, there’s still a huge hangover from the pandemic. Remote or hybrid employees are continuing to be the model, because one of the changes and challenges we have in our existing commercial office space is the aged infrastructure. Vacant properties are requiring an enormous facelift to meet the new expectations of the employees.

CCPIA (15:10) If you think about it, most remote employees have a better infrastructure in their own homes and apartments than they do in their drafty old offices. They’re warmer. They’ve got reliable internet. They’ve got all of those things that they need around them that they’re either sitting on their couch or in an office space. And they don’t need to come to an office, because when they go to the office, they’re almost unhappy or disenfranchised, which is interesting. They don’t need the companionship of other employees to give them what they need.

CCPIA (15:48) So that being said, let’s look at multifamily. To me, multifamily is, again, like I said, one of my favorite things to talk about. Interest rates are rising across all sectors of real estate, and that hits multifamily just about as hard as it hits anything else, because most consumers now are not able to afford, because of these high interest rates, to move into home ownership.

CCPIA (16:24) And so being in the renter’s scale and the renter’s arena is far more viable for them than it certainly is in the area of home ownership. And that is not just in the lower economic realms, but actually in the middle and upper as well. And so I think there’s going to be a continued expectation for buyers to remain out of the mortgage market through the rest of 2024.

CCPIA (16:55) This is an election year. I don’t see a lot of things moving, which is, again, not great news for home inspectors, but not horrible news for commercial inspectors.

CCPIA (17:07) So with that, I want to show a graph, if I can get it up here just right. In this graph, in the dark line, this is the rent level, and we’ll see that always rising. But in the squiggly gray line, that’s mortgages. So if the average rent right now for a property is between $1,500 and $2,000, the average mortgage is $3,280. So that’s a big discrepancy in the difference between a mortgage payment a month and a rental payment a month.

CCPIA (17:57) And so that’s something to look at. Now, one of the challenges we have when we start thinking about multifamily or the rental market inspections is we’re not necessarily going to get called for too many upper end apartment complex inspections, just because that’s not usually in the voice or the mindset of many of the consumers buying those properties for investment.

CCPIA (18:26) But we’re certainly going to continue to be called for the middle to lower end of the rent rate. And so just be ready. And again, I don’t want to stress enough, think about multifamily inspections as part of your commercial portfolio.

CCPIA (18:44) Now, just as we said earlier, I think retail properties are going to continue to be stagnant with the exception of that overperforming and excellent opportunity for neighborhood and strip centers. So everything I read says that expect that to show a nice steady performance in 2024.

CCPIA (19:07) And then lastly, those industrial properties. The last two years have shown excellent and steady growth. And everybody expects 2024 to be the same. Even with e-commerce, the experts are still anticipating at least a 5% growth over 2023.

CCPIA (19:29) So with all of that, you need to sit back as you’re making your plans and think about where do you want to be in the commercial real estate inspection market? Do you want to focus on everything? Are you going to micro-focus on one sector that might be very prevalent in your marketplace? Do you want to focus on multifamily, retail? Do you want to focus on industrial? Every one of us has a different comfort zone. So that gives every one of us the opportunity to craft what we want to inspect.

CCPIA (20:07) So spread your message, get training where you lack experience, get confidence where you lack confidence, and by all means, follow the comps up and do great commercial inspections.

CCPIA (20:27) Until next time, this is Building Your Business.