Hello, my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from Samantha and she says, hi Marco. I am currently trying to study up on the real estate in San Antonio. And while your article helped me a lot with the residential areas, I was just curious about how the market looks with non-residential or is it the same?

Great question Samantha. So there are a lot of similarities and overlap between residential and nonresidential or what we would call commercial real estate, but there are some differences. And so I will give you a quick overview here of what those differences are.





So there are plenty of forces that dictate the real estate market. Some of them being political, some of them being economic, some of them being psychographic, these are all influencers. Um, but those are the major ones.

So these influences are better measured by what we'll call market drivers. And they are the underlying force behind the actions of a real estate market. So when it comes to commercial real estate, there are three key drivers. The first one being yield, the second one being business confidence. And the third one being the occupancy rates are what some people might look at as being vacancy rates. But let's begin with kind of a basic and define what a market driver is. Simply put, a driver is a principal force that is positively influencing a market. So when a market driver is present, there is likely to be a positive market or industry trend that's showing up. And when that happens, you see values go up and down because demand may increase or it could just decrease. But when a market driver is not there or it's there but weak, you have less force behind that market.

And what ends up happening is that demand drops and you see prices drop along with it or the yields go down with it. And with commercial real estate yield determines market value. Now if you talk to some sharp real estate investors, they'll tell you that that's a good time to go into a market. It's the, you know that whole saying of BI-LO sell high or just buy low and keep forever. But when you're going in with low demand, the theory is that you can get a better deal. So let's just talk about these real quick. The first key driver being yield is simply based on income. When you are a commercial real estate investor, you want income from your investment. Obviously it's not really just the big payoff from the principal because with commercial you may eventually sell that property and you get a capital return, but it's really an income-based investment.

And so in the commercial world, the income is called yield and it is the annual return on an investment, not including any capital growth. So yield is a big deal and a key focus area in the commercial space. The second key driver is business confidence. You'll often hear people on TV in the media, in other words, talking heads. Commentators often talking about their view on commercial real estate and commercial properties. By looking at business confidence. If those businesses are confident, the economy will perform better in the coming year, it's likely they're going to see a good flow of foot traffic. If they're a retailer or plenty of work coming in. If they're in the industrial sector or if they're an investment based business, then they'll see good returns, whether it be in the stock market or whatever it may be. So business confidence is also a driver that drives the commercial space.

And then that third driver, our occupancy rates true with any investor. Investors in the commercial space don't like to seek empty properties. And because the underlying value of a commercial asset is actually aligned to its tenants, having a vacancy is arguably the biggest fear in the commercial property investment space. And so it's one that has to be avoided. And this is why management is so critical in the commercial world.