Commercial property
The term commercial property (also called commercial real estate, investment or income property) refers to buildings or land intended to generate a profit, either from capital gain or rental income.[1] Commercial property includes office buildings, medical centers, hotels, malls, retail stores, multifamily housing buildings, farm land, warehouses, and garages. In many states, residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes.
Commercial buildings are buildings that are used for commercial purposes, and include office buildings, warehouses, and retail buildings (e.g. convenience stores, 'big box' stores, and shopping malls). In urban locations, a commercial building may combine functions, such as offices on levels 2-10, with retail on floor 1. When space allocated to multiple functions is significant, these buildings can be called multi-use. Local authorities commonly maintain strict regulations on commercial zoning, and have the authority to designate any zoned area as such; a business must be located in a commercial area or area zoned at least partially for commerce.
Types of commercial property
Commercial real estate is commonly divided into five categories:
- Office Buildings – This category includes single-tenant properties, small professional office buildings, downtown skyscrapers, and everything in between.
- Retail/Restaurant – This category includes pad sites on highway frontages, single tenant retail buildings, small neighborhood shopping centers, larger centers with grocery store anchor tenants, "power centers" with large anchor stores such as Best Buy, PetSmart, OfficeMax, and so on even regional and outlet malls.
- Multifamily – This category includes apartment complexes or high-rise apartment buildings. Generally, anything larger than a fourplex is considered commercial real estate.
- Land – This category includes investment properties on undeveloped, raw, rural land in the path of future development. Or, infill land with an urban area, pad sites, and more.
- Miscellaneous – This catch all category would include any other nonresidential properties such as hotel, hospitality, medical, and self-storage developments, as well as many more. [4]
| Category | Examples |
|---|---|
| Leisure | hotels, public houses, restaurants, cafes, sports facilities |
| Retail | retail stores, shopping malls, shops |
| Office | office buildings, serviced offices |
| Healthcare | medical centers, hospitals, nursing homes |
| Multifamily (apartments) | multifamily housing buildings |
Of these, only the first five are classified as being commercial buildings. Residential income property may also signify multifamily apartments.
Investment
The basic elements of an investment are cash inflows, outflows, timing of cash flows, and risk. The ability to analyze these elements is key in providing services to investors in commercial real estate.
Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment. An example of this sort of investment is a real estate fund.
Cash inflows include the following:
- Rent
- Operating expense recoveries
- Fees: Parking, vending, services, etc.
- Proceeds from sale
- Tax Benefits
- Depreciation
- Tax credits (e.g., historical)
Cash outflows include:
- Initial investment (down payment)
- All operating expenses and taxes
- Debt service (mortgage payment)
- Capital expenses and tenant leasing costs
- Costs upon Sale
The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year-over-year. It is important to be able to predict the probability that the cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of them will be as predicted, and what the probability is that there may be unexpected cash flows, and in what amounts they might occur.
The total value of commercial property in the United States was approximately $6 trillion in 2018.[2] The relative strength of the market is measured by the US Commercial Real Estate Index which is composed of eight economic drivers and is calculated weekly,
According to Real Capital Analytics, a New York real estate research firm, more than $160 billion of commercial properties in the United States are now in default, foreclosure, or bankruptcy. In Europe, approximately half of the €960 billion of debt backed by European commercial real estate is expected to require refinancing in the next three years, according to PropertyMall, a UK‑based commercial property news provider PropertyMall. Additionally, the economic conditions surrounding future interest rate hikes; which could put renewed pressure on valuations, complicate loan refinancing, and impede debt servicing could cause major dislocation in commercial real estate markets.
However, the contribution to Europe's economy in 2012 can be estimated at around €285 billion according to EPRA and INREV, not to mention social benefits of an efficient real estate sector.[3] It is estimated that commercial property is responsible for securing around 4 million jobs across Europe.
Commercial property transaction process (deal management)
Typically, a broker will identify a property that fits a set of criteria set out by an acquisitions, capital investment, or private equity firm. The firm will perform an informal assessment of the property location and potential profitability, and if they are interested, they will signal their intent to move forward with a letter of intent (LOI).
An investment committee with senior acquisitions executives reviews all pending deals and advises whether to move forward with a purchase and sale agreement (PSA), and a deposit. A PSA is an exclusive agreement between the seller and a single interested buyer. No other LOIs or PSA may exist for one property at a time.
Once a PSA is executed, the acquisitions team usually has 30 days to perform due diligence, unless an extension is granted. During this 30-day period, the acquisitions team investigates the property thoroughly in an attempt to uncover any undesirable characteristics, damage, or other circumstances that could affect the profitability or final selling price of the property.
The acquisitions team may want to investigate the rent roll, existing vendor contracts, city permits, insurance policies, etc.. The acquisitions firm may hire a third party to conduct an appraisal, environmental reports, traffic counts, and more. The ultimate goal is to gather as much information as possible to make an informed investment decision.
Once due diligence is complete, the acquisitions team must decide whether to move forward with the purchase to closing. Closing is a window of 10-15 days during which the acquisitions firm owes an additional deposit, and they must finalize financing.
When a deal closes, post-closing processes may begin, including notifying tenants of an ownership change, transferring vendor relationships, and handing over relevant information to the asset management team.
See also
- Class A office space
- Commercial building
- Commercial Information Exchange
- International real estate
- OOCRE
- Real estate
- Estoppel certificate
Further reading
- Maliene, V., Deveikis, S., Kirsten, L. and Malys, N. (2010). "Commercial Leisure Property Valuation: A Comparison of the Case Studies in UK and Lithuania". International Journal of Strategic Property Management. 14 (1): 35–48. doi:10.3846/ijspm.2010.04.CS1 maint: multiple names: authors list (link)
References
- Investopedia Definition
- AMADEO, KIMBERLY (July 31, 2018). "Commercial Real Estate and the Economy". Dotdash.
- Gareth, Lewis (2012). "Real estate in the real economy" (PDF). Cite journal requires
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