What Drives Our Economy?

Have you ever stopped and wondered about how things progress in the cities, and countries we live in? What determines how much a house is worth or how much you pay for rent at your office building? This article talks a little bit about what factors influence the way our markets are driven.

When it comes to commercial property the drivers can be separated into two categories: space markets and capital markets. So let’s define these terms a little bit to gain a better understanding.

Space Markets

Space markets drive returns through their effect on market rent incentives. For example, a thriving market where demand growth outweighs supply growth will cause vacancy rates to fall putting pressure on rents to be higher therefore creating a higher return.

In space markets demand drivers such as higher GDP will result in an increased demand for commercial property. This factor drives up rent, income growth and asset prices. Demand can never be seen alone without its other half, supply, which is equally important to understand as a market driver.

Commercial property supply does not adjust quickly and has an average lead time of about two years. With everything else equal, a growth in supply will lead to higher vacancies, lower rental growth, and lower returns.

Capital Markets

Capital markets impact returns through capital flows and asset pricing. For example, the attractiveness of a property, in relation to another potential investment. This will entice a stronger flow of capital into the property therefore creating growth pressure on asset prices.

Ever since the GFC hit, the spread between bonds and commercial property cap rates have increased. Globally we are seeing low interest rates and investors are engaging in a chase to find an increased spread in commercial property.