Economic factors affect the economy and include interest rates, tax rates, Gross Domestic product, government policies, inflation, unemployment, per capita income, among others. These factors may have a constructive impact or a harmful effect on the economy and the economic activities within any given nation. This paper's main objective is to extensively analyze the effects of the various economic effects on Commercial Real Estate in U.S.
For instance, the increase In Gross Domestic Products (GDP) boosts the commercial real estate stability in U.S. GDP equals to consumption plus savings plus government expenditure plus exports minus importations. Therefore, the rise in the GDP increases human consumption since there is a lot of cash flow in the economy (Ghent et al., 2019). The increase in cash flow comes from the rise in government spending. In this scenario, people live a more affluent life because there is enough cash at their disposal. As a result, people develop the curiosity to live more affluent lives, and thus many end up buying private residential homes. This circumstance boosts the commercial real estate sector since there is a high demand for real estate properties. The real estate retail sector reaps massive profits, and thus the investors end up building more properties to quench the rising demand for houses in the market. Similarly, an increase in GDP will lead to a rise in new properties,
Consequently, the decrease in GDP results in low demand for real estate properties. There is less government expenditure at these moments, and hence the cash flow in the economy is minimal. At these times, the country experiences tough economic times, and the commercial real estate sector might incur huge losses since the consumer's buying power is reduced. The Properties built on a loan remain vacant for long and servicing these loans becomes a considerable problem. The owners of these properties are later compelled to sell these properties at a low price and hence weakening the sector's economic stability.
Unemployment is another economic factor that has an unfavorable effect on commercial real estate. The scarcity of jobs and employment opportunities not only affects commercial real estate alone but also the rest of the business. Unemployment rates increase the mortgage arrears since individuals do not have the financial power to buy or rent expensive properties (Dabara et al., 2016). The unemployment factor leads to severe financial hardships and poverty. Debts increase, and due to massive job losses, tenants may find it hard to foot their rental bills, resulting in homelessness. Due to the accumulation of housing arrears, tenants end up vacating their rental houses, which results in considerable losses to the commercial real estate sector.
On the other hand, inflation is an economic factor that affects commercial real estate In different ways. For instance, inflation is the increase in the prices of goods and services. This condition leads to a decrease in consumers buying power. Not only commercial real estate, but inflation also has a substantial impact on numerous sectors (Malpezzi 2017). As a result of an inflation cycle, property values will increase since labor and construction materials are high. Designers will devote more when structuring new assets, resulting in the unavoidable rise in the prices for new real estate assets. Alternatively, investors might see it as expensive to create new properties due to labor and construction materials' high costs. As a result, prevailing assets will similarly increase in price due to the reduced supply of new buildings. When the inflation cycle comes to an end, the commercial real estate sector might incur huge losses since the properties cannot be sold at a reasonable price equal to construction cost. Simultaneously, since the consumers buying power is minimal, new and existing properties might stay for a long time without buyers. As a result, they might deplete value due to the emergence of new, cheap, and fashionable properties if the inflation cycle is over.
Due to high inflation rates, the cost of borrowing will be increased. It is because inflation devalues currencies and forces money lenders to raise interest rates. The high costs of lending affect both consumers and real estate designers. Since many construction corporations depend on on credits to tackle their ventures, the upsurge in interest tariffs will inevitably affect in higher assets values. Following high inflation rates, the rental rates will soar high. As a result of high price of mortgages, most individuals will choose to lease houses instead of buying them. The increased demand for rental assets and the incursion of renters will prompt property-owners to increase rental charges.
Ghent et al. (2017) argue that per capita income may affect commercial real estate in several ways. The increase in per capita income means that there is enough cash flow in the economy and an increase in demand for mortgages. At these economic times, commercial real estate's make enormous profits for the sale of properties. Consequently, low per capita income reduces the consumer's buying power, resulting in a decrease in purchasing power. Similarly, unless the national income is evenly distributed, per capita income can not serve as a good indicator of development. Therefore, low per capita income may prompt investors to set up new properties, which increases the prices of existing ones.
