How the Residential Market Informs the Commercial Market
The demand for office and retail properties has declined since the COVID-19 pandemic. Residential real estate remains a seller's market, but these sectors are not mutually exclusive. Here is how the residential real estate market informs the commercial market.
Location
The places people choose to work are not always where they choose to live. If someone moves to a location to begin their career, they will likely rent. A 2022 Harvard report shows people are starting to prefer the flexibility of being in a rental. New workers are more likely to travel to a new location for work without wanting to make it a long-term home. As they gain more experience and opportunities arise, they will look at other options that are better for their personal preferences.
Recent surveys from the United States Census Bureau report found around 40% of people who move go to a different county. There are many reasons for this, including being closer to family, going to a more preferable climate or finding a safer location.
How does all this affect the commercial market? When cities make themselves attractive in multiple ways, they are more likely to have people purchase homes there. Businesses need to provide offices where their employees want to reside.
When more commercial space is available, there will likely be more jobs, encouraging people to go there instead of a comparable place. Each sector informs the other about the demand.
The residential market will directly or indirectly impact the market supply regardless of where a commercial building sits.
Supply
While the residential and commercial markets can grow together, they can also grow apart. There is only so much land in a given town and what is used for residential purposes cannot be used commercially.
Many planning commissions will designate areas for specific purposes like central business districts (CBD), which can attract many companies. These districts do not expand into surrounding neighborhoods. Homes are often organized together in a CBD, making it nearly impossible to use them commercially. Businesses must purchase the available spaces — if there are no options, they have to go elsewhere.
Someone can purchase a property for either purpose in areas without strict regulations. That can bring competition between markets and make it so the more residential properties that exist, the less commercial ones are available. Home and business owners can build on the land, but the further out a business relocates, the less likely people are to travel to it.
Prices
Many enterprises needing physical workspaces get priced out. The inability of companies to afford them comes from various factors, including a chain effect from high residential real estate prices.
When building material and energy prices increase, so do the cost of items. Increases in inflation lead to less affordable housing. People are on tighter budgets, so they are less likely to buy from unessential businesses. However, even essential companies often have to increase their prices to manage the cost of materials, making it harder to accommodate customers. The economic state could force physical locations to relocate.
It is not just prices that prospective property owners consider. Proximity to good education and health care, low crime rates, and established shops also play into a home's appeal. As property owners balance prices with these elements, commercial realtors must closely monitor residential sales to find the best location for their clients.
Sellers and renters offering affordable prices in struggling areas get the most traction. However, residential real estate remains in a seller's market, with buyers struggling to regain the power. Commercial properties need to be where their customers and potential employees are. The most affordable locations in attractive areas are where buyers flock and are likely where businesses will want to reside.
Demographics
The world is changing and the commercial sector needs assistance to adjust. Millennials and Generation Z are becoming home and business owners. However, many choose to work remotely.
A survey from FlexJobs found 56% of millennials and 40% of Gen Z say working remotely is important to them. The pandemic forced many businesses to implement work-from-home or hybrid schedules, and many are still working to bring employees back to the office. Bars and restaurants in particular suffered when surrounding businesses switched to remote or hybrid locations.
The type of work a person wants to pursue also influences the commercial market. Technology, sales, media, banking, administration, accounting, and even some medical and pharmacology professions are now remote, eliminating the need for a physical office space. However, careers that need physical locations can still struggle to find a suitable area.
Experts predict the era of downtown business districts is ending. Office vacancies in New York City have increased by 70% since 2019, and other metropolises are experiencing a similar fate. Empty office buildings waste money, forcing organizations to close their previous office spaces permanently.
Without changing demographics, it is reasonable to think businesses could buy back office spaces. However, current numbers show the impact new values create. Even if workers move feet away from an empty office space, they will likely work from their residence. Knowing who is purchasing residential properties in an area can indicate whether a business is likely to succeed in buying a nearby commercial option.
Tips for Using the Residential Market As a Commercial Realtor
Commercial realtors can use data from residential sales to find the best options for their clients. If home availability is rising in a location and purchases are not meeting them, it could indicate there will be less business. No company wants to enter a dying community, as their brand is unlikely to save it.
Knowing who is moving to the area can also help. If your client's customer demographic aligns with the ages and lifestyles of those purchasing the homes, their enterprise could be very profitable there. Pay attention to the people buying houses, as well as those purchasing homes as landlords. Examining the prices in the area and knowing the laws of each municipality can also greatly impact your client's success in a store or office building.
Taking Notes from the Residential Sector
The U.S. commercial and residential real estate sectors are going in opposite directions, but that does not mean they cannot inform one another. Knowing the residential market gives commercial realtors critical insight into making sales.
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