The basics of commercial real estate are simple. A tenant needs office space. An owner needs to lease their space to a tenant. But once you get into the details of the transaction, things become complicated really fast.
A good amount of my time working with clients is spent answering their questions. I even wrote 2 books on the subject (How to Win in Commercial Real Estate Investing and The Art of Commercial Real Estate Leasing). Allen Buchanan, one of our company’s thought leaders, is a true pro, and he put together the below article for the Orange County Register addressing the 5 most common commercial real estate questions.
Here are the top three questions and my answers for the Metro Phoenix office market, which is a bit different from Allen’s market in Southern California:
- How do commercial agents get paid?
The property owner pays us. Almost all properties are “listed” and the owner is already paying a fee. Tenant Advocates share in that fee.
- How long have you done this and what changes have you witnessed?
Like Allen, I have been doing this since 1984 and was one of the Founding Principals of Lee & Associates Arizona in 1991. There have been huge changes in the business (consolidation, national accounts, technology, etc.) but, as I explain in my book that I co-wrote with our Founder Bill Lee, Chasing Excellence, one thing never changes: relationships.
- How is the market?
We are in Phoenix and the market has been a long, slow climb out of the Great Recession. We have several markets (Tempe and Scottsdale) that are on fire because of the tech boom, and other markets that are still over 20% vacant. Now is the time to have a real pro on your team.
We are here to answer questions, and make your life easier one transaction, one client at a time.
5 Frequently Asked Commercial Real Estate Questions
By Allen Buchanan
January 21, 2017
I’m often asked questions as a commercial real estate professional. For this week’s column, I considered five of the most commonly asked questions.
Part of my research involved polling colleagues. I believe the questions and the responses are interesting. I will handle these a la David Letterman (remember him?) by discussing in order of least to most relevant.
Question number five: Can I make changes to the space, and if so, who pays for it?
Answer: Generally and it depends.
Changes to a building – adding additional office, a power upgrade, sprinkler retrofit, paint and carpet, moving walls, installing racks, distributing power, etc., can generally be accomplished subject to ownership and governmental approval with the proper permitting and code construction.
Changes to the square footage (for example, adding a structural mezzanine), changes to the common area, fencing required parking spaces, creating windows in bearing walls are not so easy.
Changes are typically paid for in one of three ways: the owner pays for all of the cost and concedes the cost (rare); the occupant pays for all of the cost (even rarer); or some combination of the two. This combination could be an owner paying for the refurbishment of the space – paint, carpet, and cleanup – and conceding the cost and paying for the cost of a sprinkler retrofit and amortizing the cost over the term of the lease.
The “acid test” of who pays depends upon the owner’s ability to pay, the owner’s motivation, the general or specific nature of the improvements (think future marketability) and the market (is the competition delivering space to the market completely refurbished). Sometimes an owner will be willing to compensate a tenant in the form of free or half rent to offset the cost of changes.
Question number four: How do commercial agents get paid?
Answer: The property owner pays us.
A common misconception is the agent’s commission adds to the purchase price or lease rate. The reality is that an engaged professional can achieve a much higher purchase price than the typical owner because of market knowledge and experience. On the occupant side, an experienced professional can negotiate a better lease rate and concession package because of our knowledge of comparables, availabilities, motivation and our expertise. The net result is a better deal for both parties.
Question number three: How long have you done this and what changes have you witnessed?
Answer: Since 1984. Numerous!
Real estate content (comps, avails, absorption, current pricing) is the same, but the method of delivery is different. Who would have foreseen in 1984 that I would be blogging and forwarding location advice electronically in 2017, before fax machines and the world wide web were invented. Or, that we could survey inventory of available buildings – in our car or at the beach – and send a list with images to our clients with the click of a button. Or, that we could send a video, in real time, of the property. Unbelievable!
Question number two: How much is my building worth?
Answer: That depends on a number of factors.
We consider the market – whether it’s trending up or down, the comparables and availabilities. If the market is up, chances are your building is worth more than the comps suggest. If the market is down, you might be best served to price lower than the recent comps and preempt a long marketing cycle.
Marketing time also plays a role. How long can you afford to market the building? A fire sale motivation will cause the building to be worth less. Does the building have special amenities such as excess or surplus land, excess power, fenced yard, freezer/cooler space, special AQMD permits, etc. For the right buyer or tenant, these amenities can add to the price.
Question number one: How is the market?
In Southern California, the market has sufficiently rebounded to cause shortages in certain product – especially manufacturing and distribution space. We are seeing huge price appreciation as well. The occupant’s mindset is that we are still in 2009 and the opposite is true. Our market is healthier than ever! Another thing that has changed dramatically is the amount of regulatory approvals necessary to make a move. A recent 20,000 square foot transaction was reviewed by seven governmental agencies before approval could be achieved. Wow!
Did I leave any out?