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Supply and demand in real estate investment: What are the trends affecting LA now?

In economic theory, supply and demand are two laws, not one. The law of supply is one principle; the law of demand is another.

But you don't need to have received an A in Econ 101 to know that supply and demand are intimately related - and that together they have a great effect on price. This is certainly true in the area of real estate, as we will discuss in this post.

What are some of the supply-and-demand factors that are affecting real estate investment and development in Los Angeles?

National (and global) trends

Nationally, U.S. commercial real estate has been on a strong run for the last six years. Prices have been climbing steadily every since the 2008 crash.

Today the Wall Street Journal reported that a plateau on prices appears to be in site. There are complex forces behind this, relating more to global stock markets than anything to do with particular real estate deals.

These global trends are starting to affect interest rates. Bonds that are backed up by commercial mortgages are expected to decline significantly this year compared to a year ago.

But there is still a lot of momentum in the market. Banks and insurance companies have money to lend and are often willing to do so. Real estate is still an attractive investment in many cases, often through the vehicle of a real estate investment trust (REIT).

The market in Southern California

Here in Southern California, the national and global trends we outlined above play out in a context of a real estate market that remains very dynamic. To put it in the simplest terms, it's still pretty hot.

One way this is reflected is a highly competitive market for residential housing. In general, there is more supply than demand - especially for homes that are not on the high end of the market. This has been reflected in scenarios involving all-cash offers and bidding wars in some cases.

How is this likely to affect real estate investment and commercial real estate? Let's take one clear example: the strength of REITs.

The benefits of REITs include ease of purchase and the receipt of quarterly dividend income. And with an REIT, these benefits are available without the burden of actively managing the property.

Pursing and protecting your interests

Of course, it's important to get sound legal and financial counsel before investing in an REIT or any other real estate project. The laws of supply and demand create many opportunities for rich returns. But to get the best results it's best to get guidance from trusted professionals who know how to help you pursue and protect your interests.

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