“When I read about the evils of drinking after golfing I gave up reading.”
By Joseph A. Dallegro | May 20, 2015
Though he shies from publicity, you might have heard of the demure Donald Trump. He’s a wealthy commercial real estate developer, the son of a wealthy commercial real estate developer and the father to wealthy real estate developers. (For more, see: Donald Trump and His Worth.)
So what do commercial real estate developers do when they aren’t firing people on their reality TV shows or tending to their awesome yellow comb-overs? We spoke to some industry experts to find out.
Commercial real estate — comprised of office space, hotels, retail space, industrial property, land and multi-family homes — is one of the three main types of real estate, along with residential and industrial. Owners of commercial real estate, say a gas station or strip mall, make money throughappreciation when they sell, but they can also pull in revenue via rent they collect from tenants. (For more, see: Find Fortune in Commercial Real Estate.)
Leases can run from one year to 10 years or more. Leases on multi-family homes usually run a year, while leases on industrial space average about five years. Office and retail space can range from five to 10 years. “Larger tenants tend to have longer leases,” said Brian McAuliffe, an executive managing director in CBRE Group’s (CBG) Capital Markets division. “Shorter-term leases provide more flexibility to adjust lease rents while longer leases provide more security, especially with credit tenants.”
There are several types of leases commercial property owners use. Under a gross lease, they collect only rent and are responsible for expenses such as property taxes, insurance and maintenance. With a single-net lease, owners generally collect property taxes on top of rent. With a double-net lease, they collect rent, property taxes, and insurance from tenants; with a triple-net lease, tenants pay property taxes, insurance and maintenance. (For information on other ways to invest in commercial real estate, see: Key Tips for Investing in REITs.)
A commercial real estate firm advises on how to best negotiate lease agreements that will attract and keep tenants — property owners need to strike a balance between maximizing rents and minimizing vacancies and tenant turnover. Turnover in can be costly for owners because a space must be adapted to meet the specific needs of different tenants, like if a restaurant is moving into a property once occupied by a yoga studio.
There are many firms in the commercial real estate space. CBRE is the largest in the world. Other big players include Jones Lang LaSalle (JLL), Cushman & Wakefield, Inc., Newmark Grubb Knight Frank, and DTZ. These companies help source commercial real estate, appraise value, broker purchases and sales, manage upkeep, find and retain tenants, negotiate leases, and navigate financing options. “A full-service company satisfies all of a client’s real estate needs, whether they be individuals, limited partnerships or institutions,” said McAuliffe.
The specialized knowledge of a commercial real estate company is helpful as the rules and regulations governing such property vary by state, county, municipality and industry and size. The rewards can be substantial, though. (For related information, see: How to Finance Foreign Real Estate.)
The U.S. commercial property market took a hit during the 2008-2009 recession, but it has experienced annual gains since 2010 and has since recovered almost all recession-era losses.
Washington-based Urban Land Institute recently released a forecast of real estate trends that predicts commercial real estate prices will continue to sharply rise through at least 2017. The Real Estate Consensus Forecast surveyed 46 industry economists and analysts. It sees commercial property increasing an average of 7.6% annually through 2017, which is up from historical long-term increases of 5.3% annually. (For related reading, see: Will Higher Interest Rates Crush Real Estate?)
The rents collected from commercial property is also on the rise. Commercial lease rates are usually quoted in annual dollars per square foot. Newmark Grubb Knight Frank recently reported that the national average for office space rent was $27.76 a square foot in the first quarter of 2015, up 4% from a year earlier, while the price asked for industrial space was $5.70 a square foot, up 7%.
The Bottom Line
As one of the three major sectors of real estate, the commercial property market is on fire. Prices are expected to appreciate sharply over the next few years. Whether owners are making money via selling or renting properties, there should be plenty of cash on hand to buy lots of hair products. (For related reading, see: How You Make Money in Real Estate.)
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Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. I am also a commercial land specialist in Phoenix and a Landspecialist in Arizona. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
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Walter Unger CCIM
Associate Broker, Kasten Long Commercial Group
2821 E. Camelback Rd.
Phoenix, AZ 85016
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