10 Commercial Real Estate Statistics (2023)


Key Takeaways

  • The commercial real estate industry is a major driver of economic growth – and investment returns.
  • Over time, the average return on investment for commercial real estate assets has been ~9.5%, which puts it in line with major equity indices.
  • General growth trends and shifting populations put the strongest commercial real estate markets in the south and west.  For example, Austin and Dallas are the two most attractive markets at the time of writing.
  • There is no one specific type of commercial real estate that has proven to be the most profitable.  But, the most profitable properties tend to have several characteristics in common:  a large number of tenants, long term leases, growth market locations, and manageable levels of debt.

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The purchase and sale of commercial real estate assets is a major industry in the US.  According to Statista, the total value of all CRE transactions in the US was ~$400B in 2019 and ~$280B in 2020.  Needless to say, commercial real estate is an important industry that is a major driver of economic activity and jobs.  In addition, CRE has proven to be a reliable way for investors to generate yield.

In this article, we are going to discuss ten commercial real estate statistics that are designed to highlight the size, strength, and utility of the commercial real estate industry.  By the end, readers will have a stronger understanding of the CRE industry and its importance to the US economy.

At First National Realty Partners, we are an active participant in the commercial real estate industry through our active purchase and management of grocery store anchored retail centers.  To learn more about our current investment opportunities, click here.

1. Is Commercial Real Estate a Growing Industry?

Yes, commercial real estate is a growing industry.  According to IBISWorld, the market size of commercial real estate, as measured by revenue, was $992B in 2020.  This figure is expected to grow to ~$1T in 2021, which represents a growth rate of ~3.1% annually.

NOTE:  The CRE industry grew steadily from ~$821B in 2011 to $1.16T in 2019, but declined in 2020 due to the impact of the COVID-19 pandemic.  

2. What is the Average Return on Investment For Commercial Real Estate?

The point of a commercial real estate investment is to earn a return.  So, investors often want to know what the average return on CRE assets is.

The average commercial real estate investment return can be difficult to calculate because the market is so diverse and many transactions happen privately, which make them difficult to track.  However, we can use certain stocks as a proxy.  According to Mashvisor, the average return for commercial real estate is 9.5%.  For some real estate investment trusts (REITs) the average return rises to 11.8%.

For context, the average return for the S&P 500, which is a basket of 500 stocks, is 10% – 11% annually.  So, it is roughly the same.  Where major differences can occur is when looking at returns for specific CRE deals or specific stocks.

3. How Big Is The Commercial Real Estate Market?

The commercial real estate market is one of the largest industries in the United States.  In fact, according to IBISWorld, it is the 5th largest industry in the US with approximately $16T in economic impact.

From an investment perspective, the size of the market is important for a few reasons.  First, it is so large and diverse that there are investment opportunities that fit nearly everyone’s risk tolerance and time horizon.  Second, it demonstrates that there is a substantial opportunity from which investors can earn a return.

4. What is The Average Appreciation of Commercial Real Estate?

Commercial real estate investment returns come from two sources:  income and price appreciation.  Income usually accounts for a small, but stable part of the overall return.  However, price appreciation is where the largest component of commercial real estate return can come from.

Commercial real estate returns can vary widely based on the property type, location, and market conditions, but, according to Nolo, the typical investment returns between 6% and 12% annually.  This is generally in line with returns offered in equity markets.  However, commercial property returns tend to be inversely correlated with equities, which means that they add an important layer of diversification to a portfolio of risk assets.

5. Is Commercial Property More Expensive Than Residential Real Estate?

Yes.  Commercial properties are more expensive than residential assets, on two fronts.  First, their acquisition price can be significantly more costly than a residential property.  For example, according to the Economic Research Federal Reserve Bank of St. Louis, the median price of a single family home in the United States is $404,700.  The median price of commercial property can vary widely based on the property type, finishes, location, and condition, but it can be in the millions.  The largest, most luxurious, well located properties could even sell for $1B or more.  Second, their carrying costs are significantly higher.

Because commercial property can be so expensive, it is often unaffordable for all but the most well financed individual investors.  But, individual investors looking for exposure to the commercial real estate market can purchase fractional shares of a commercial property through investment vehicles like a REIT, private equity firm, or Delaware Statutory Trust.

6. How Much Commercial Real Estate Was Built in 2020?

Commercial real estate construction is a major driver of jobs and economic activity.  To demonstrate this point, Statista reports that the total value of commercial real estate construction activity in 2020 was ~$80B.  However, it should be noted that this level was a significant decline from previous years due to the impact of the COVID-19 pandemic.  For context, pre-pandemic levels of commercial real estate construction activity reached a peak in 2018 at $95B.

From an investment standpoint, construction of major property types – like multifamily – in the commercial real estate sector is a signal of demand.  The more construction activity, the stronger the demand, and vice versa.  The more demand, the higher prices are likely to rise.  Needless to say, this is an important metric that investors pay close attention to.

7. What State Promises The Most Commercial Real Estate Growth?

When it comes to commercial real estate growth, the saying that everything is bigger in Texas is true.  According to this report from CBREAustin, TX ranks as the #1 commercial real estate growth market followed closely by Dallas.  This is due to strong population growth, a business-friendly environment, low taxes, high occupancy rates, and brisk leasing activity.  When these factors are combined, they make for attractive commercial real estate growth markets.

At a higher level, the broader trend – especially in the age of remote work – is that markets in the south and west (Miami, Orlando, Phoenix, Los Angeles, Nashville, San Francisco) are growing while those in the northeast and midwest (New York and Chicago) are slowing for the same reasons described above.  Americans increasingly prefer warmer climates, more space, less density, and ample recreational activities.

8. How Much Have Commercial Real Estate Prices Risen?

Investors like commercial real estate for the stable cash flow, tax benefits, and long track record of slow, steady increases in value.  According to Real Capital Analytics – via MillionAcrescommercial real estate prices rose at an annual rate of 1.3% over the last year from April 2020 to April 2021.  

Within this appreciation figure, there are substantial differences by property type.  For example, multifamily property owners enjoyed a 7.6% increase over the same time period, industrial properties rose 9.4%, retail space rose 1.3%, and office space increased 3%.  These figures are particularly notable because apartment, retail, office, and industrial sectors saw their first positive returns since the beginning of the pandemic.

9. Which Are The Most Profitable Types of Commercial Real Estate Investments?

When thinking about the most profitable commercial real estate investment types, it is important that investors recognize that profits and returns can vary widely based on the specifics of a deal.  As a result, it is difficult to say, objectively – which property type(s) are the most profitable.  Instead, it is easier to define the characteristics of properties that produce strong returns.  There are six that are noteworthy:

  • Number of Tenants:  Properties with a high number of tenants may be more likely to be profitable because the scale allows important back office functions to be centralized, which can make operations more efficient.
  • Market:  Properties located in fast growing markets tend to be more profitable than those that are located in stagnant or shrinking markets.  Evidence of high growth markets can be found in metrics like:  population growth, job growth, new business formation, and rising median wages.
  • Leases:  Properties that have tenants on long term leases (5+ years) tend to be more profitable than those on short term lease (1-3 years).  This is because they have lower turnover costs and lower vacancy rates.
  • Tenants:  Fundamentally, the success of a commercial real estate investment is highly dependent upon the tenant’s ability to pay their rent, on time, every month, for the entire term of the lease.  Profitable properties have strong tenants who have the financial resources to pay their rent no matter the economic climate.
  • Condition:  Profitable properties are well maintained, with all major mechanical systems in good working condition.  When this is the case, they have a higher chance of attracting tenants who may be willing to pay a rental premium.
  • Financing:  Finally, a property’s finances can have a major impact on its investment returns.  Properties that have high levels of debt, loans with variable interest rates, restrictive loan covenants, or insufficient operating reserves have a higher risk profile – and may have a higher chance of bankruptcy – than a property that is conservatively capitalized.  

Properties that have these characteristics are not necessarily guaranteed to make a profit, but the chance may be higher because these characteristics tend to be correlated with properties that make a profit.

10. What Percent of Millennials Are Interested In Real Estate Investing?

It may come as a surprise to many that millennials are very interested in real estate investing.  According to a recent Harris interactive survey, 55% of millennials are interested in real estate investment, which was the highest percentage of any age group surveyed.  Further, 88% of them said that they think real estate is a good investment.

Given that real estate prices are a function of supply and demand, the fact that so many millennials are interested in it provides a positive signal for future prices.

Final Thoughts

Given that commercial real estate investment is the core of our business, it should be no surprise that we are bullish on this asset class going forward.   But, all commercial properties are not created equally.  In fact, we have a saying that we look at 100 properties and choose one.  We believe that individuals must subject potential properties to extensive due diligence – with a focus on fundamentals – and only commit capital to those that are a good fit for an investor’s risk tolerance, time horizon, and return objectives.

Interested In Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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