A Link between Commercial and Residential Real Estate
Things are looking up for Long Island’s commercial and residential real estate with both markets on the rise due to historically low borrowing rates. Does that imply a correlation between these markets? Let’s take a deeper look to find out.
Similarities and Differentiators
First, as one would assume, there are both similarities and differences between the Long Island commercial and residential real estate markets, and it would be
imbalanced not to briefly touch upon these characteristics before discussing any correlation between the two markets. Both types of real estate are seen as
investment assets, and represent a substantial portion of the total investment universe. However, they do differ in many aspects, most importantly, drivers of
Typically, there are two reasons why one would purchase residential real estate. First, as a consumption good, and second, as an investment asset. The former
driver, consumption good, is the strongest reason why residential real estate is purchased on Long Island. As for commercial real estate, the sole intention in
purchasing commercial property is to generate return, in terms of both cash flows and value appreciation. These two drivers alone do create much differentiation between the markets.
Correlation between the Markets
So, are you saying that there is too great of differentiation and no correlation? No, actually on Long Island, there is a strong correlation between the commercial real estate market and the residential real estate market. In fact, theory from urban economics suggests that the same basic forces influence demand for both housing and commercial real estate and cause both markets to move mostly in lockstep. The demand factor is the key here. The relationship between commercial and residential real estate varies depending on demand.
For example, an increase in household wealth will likely cause an increase in commercial spending, therefore, a demand for increased commercial space; a direct
positive correlation. Likewise, a loss of jobs from closures in retailers or office buildings will create a weakened housing market due to little movement and
cautious spending; a direct negative correlation. Whether these market demand factors are positive or negative, they seem to have a direct relationship with each other.
Purchasing in the Residential Market
As we saw above the markets do correlate, so when one looks to purchase residential real estate, they may what to also take notice of the surrounding commercial real estate market.
Right now, there are very low borrowing rates making for a thriving real estate market here on Long Island. Tax benefits are also not to be overlooked. 2013 was definitely a year of gains, and although mortgage rates are slightly increasing, I predict that 2014 will closely follow.