Investing in commercial real estate can be a fun and lucrative undertaking. In fact, the annual ROI for commercial properties typically falls between 6 and 12%, depending on the health of the local economy and location of the property, among other factors. These types of figures can make commercial investment extremely appealing, but it’s more than just a numbers game. Successfully investing in commercial property takes research and preparation. The more that you understand the ins and outs of commercial investing, the less likely you are to fall victim to some of the pitfalls that can come with the territory. Here’s everything that you should know prior to investing in a commercial space to ensure your success.
Understand What the Term Means
The term itself, “commercial property” is actually quite broad. When you break it down, there are five main types of commercial properties; industrial space, office space, multifamily properties, retail properties and special purpose properties. Broken down even further, you might find more specific niches, such as hotels, medical office space, self-storage facilities, land, elder care housing, and more. Understanding the differences between these could be the difference between success and failure as an investor.
To understand exactly how property type can be so influential, you have to also understand the importance of knowing the market dynamics in your area. This largely includes knowing the supply and demand in your local market for particular types of properties. The higher the demand, the more lucrative your investment will be. That being said, you can also likely expect to pay a higher premium up front for the property if the demand is high. Real estate markets are constantly fluctuating, so watching the trends in your area is crucial to your success. You may be able to buy a property now for a lower price, knowing that the demand for that property type is likely to increase in the future. The health of your local market is imperative information that deserves diligent research.
Vacancy & Rental Rates
Within the commercial property that you are looking to invest in, you have to know the percentage of all of the available units that are not currently occupied. This helps you to assess how much work you will have to do to secure tenants, what rents you can expect to be bringing in immediately and how that will offset the initial investment costs. Another part of this is diligently researching rental rates with comparable properties in your area. How much can you realistically ask for your space? Also, how long are competitive properties sitting on the market, on average? All of this information will assist you in making a fully informed decision.
The Importance of Location
Even within an individual market, there can be huge fluctuations in price and demand based on property location. Location is potentially the largest influential factor that will determine your success as an investor. That doesn’t necessarily mean that you have to pay top dollar for a prime commercial property, either. Sometimes up-and-coming properties can be extremely valuable investments. The main things to look for are low vacancy rates in neighboring properties, good connectivity and exposure, and the presence of some established businesses within the area. These elements can have a big impact on your ability to generate regular rental income that boasts high capital appreciation.
Not all commercial properties are created equally, and this is important to remember. Just because a property may appear one way, doesn’t mean that you shouldn’t do some deep digging before you dive in headfirst. The stability of the building structure (foundation to roof and everything in between) and the quality of the materials used (both inside and out), among other things, can greatly impact the return on your investment. Purchasing a quality property will also help you to avoid costly expenses later down the line. Make sure that you are hiring a qualified inspector and/or contractor to go through the punch list with you.
It’s also important to recognize that both purchasing and maintaining a commercial property can involve a bit more time than a residential property. To close on your investment involves four main stages:
- Escrow: This part of the process ensures that both parties in the sale have met the agreed upon requirements. It is a much more formal process with CRE transactions with more extensive paperwork.
- Legal entities and authorities: Unlike residential transactions that take place between two parties, commercial properties are typically carried out between two or more legal entities and may have multiple contracts. This can add a lot of time to the process.
- RESPA and due diligence: The Real Estate Settlement Procedures Act protects buyers from purchasing potentially hazardous or faulty properties without full disclosure and, because buyers will often push for more time in this process in commercial transactions, it can become lengthy. It also influences the due diligence process, which becomes much more extensive.
- Title and closing: Lastly, the title and closing will need to be signed and there is far more paperwork included in this process than in a residential property because of zoning and environmental clauses, among other things.
Maintaining the property is, in and of itself, a time-consuming undertaking, as well. Will you work with a property management company or maintain it yourself? Who will collect rents, maintain the landscaping, monitor the structural integrity of the building, et cetera? There are lots of factors to consider here.
Is Commercial Investment Right for You?
As you can see, there are lots of factors that play into a successful commercial real estate investment. The best idea? Don’t go it alone! Working with a reputable commercial real estate broker can help you to navigate the Salt Lake City commercial market with ease, while also ensuring that no steps are skipped in the process. Contact SVN Alta Commercial today and let us invest in your success.
For a real estate business, there are a number of ways that implementing high tech gadgets and the latest and greatest technology in the office, will benefit your overall business productivity. These types of technological upgrades can make employee work life easier, smoother and can increase efficiency. This will in turn improve the quality of work being done and leads to higher chances of success; this equates to more money as well.
How can you use upgraded technology to increase employee efficiency, productivity and overall business success? Continue reading for a number of examples.
Real estate in general can use their own website for so many different reasons; advertising services, showing commercial real estate properties available, contact information for potential clients and more. A good website entices visitors to contact the business for the services that are advertised. It displays professionalism and seeing a good website makes people think your business must be doing well. There is an increased chance that visitors will trust in a company or business with a well-built website, because it also makes people think you have enough resources to spend the money on a well-functioning, high quality website. In addition, a website that encompasses a good user experience lowers the chance of visitors becoming frustrated or not finding what they’re looking for and navigating elsewhere for service. This is important in terms of having a positive online presence. Having a good online presence involves having good technological resources. A business will need to have good web designers involved, which also requires web design programs and software available to employees. This involves good quality computers and space designed for these types of employees.
Also, having resources who specialize in search engine optimization and ensuring the website shows up in Google search results will greatly increase traffic which eventually leads to company success. There is specific educational experience that is involved with employees being successful marketing specialists; this usually involves a number of years of experience and knowledge of marketing tools. The more opportunities the website has to appear across multiple platforms increases online presence.
Marketing and Outreach
If a company has the best in technology, they can increase the performance of both their webpages and the quality of their resources in the office. Something as simple as having the fastest internet connection in the office allows higher productivity, employees can work without setbacks. This is especially important for a company with hundreds of employees and multiple departments.
A benefit of having access to high-end technology is that it can be very apparent through a business’ methods of marketing and engagement. There are usually budgets set for businesses’ marketing tools and resources and you can almost see how large a budget might be by how much you see the company advertised across different platforms, like social media ads or in related online blogs or articles. In addition to social media, the use of email marketing is a very important tool. It’s pertinent to have a list of contacts in real estate, including clients, business associates, colleagues and other real estate companies. The reason this is important is because another technological advancement that exists in today’s world of marketing and outreach for businesses involves email marketing. Of course, email has been around for quite some time now, but the way it has expanded really benefits businesses. Email marketing has specific online tools available for purchase (where price usually depends on number of contacts), where you can contact entire groups of contacts at once. This is important to keep up regular communications to consumers about advancements, updates and most importantly it’s a great way to advertise new properties available to a large group at once. This increases the potential for engagement and outreach when people are simply browsing the web for unrelated things.
Most of these marketing platforms include a central hub for different marketing tools that your business uses to promote themselves. It acts as the centre of your marketing platforms and as a tool for keeping all your contacts in one place. What’s great about the more advanced marketing platforms is that it also provides the company with reports in regards to engagement across different platforms, in terms of how many clicks and opens your emails have received. This is one of the new marketing tools that greatly benefits the whole company by showing you what your clients respond well to.
Communication with Clients
Through marketing strategies, companies are consistently communicating with potential clientele. There is an aspect of direct communication with people interested in the service. For example, visitors to your website or social media page may send you a direct message or send an email to your support team. It’s good to have an easy, quick and effective means of communication through any and all channels. The easier the user experience, the higher the chance of making connections and building a client base. Again, this will lead to more money and higher chances of success by landing more clients looking for commercial or investment properties. The chances of someone trying to reach out to a company after being unable to contact someone easily, is very low. The advantage of using good quality tools in an office can benefit this aspect of a business greatly.
You want the best kind of communication tools. This can involve a number of different technological advancements like rather than having one main landline, each employee in the office has their own lines. Having individual extensions to reach someone directly can greatly impact the efficiency of contacting the business. Nobody wants to reach a voicemail box that’s full, or listen to an endless list of employee names and their extensions trying to reach a particular agent. It seems like a small thing, but it can really affect the experience someone has trying to make contact. Especially if a potential buyer is serious about a property and is eager to make contact. It can even affect the experience of buying property and make it seem tough and negative overall.
To elaborate further on the additional ways you can increase ease of communication using high-end office technology, would be by increasing the available means of communication. When a business has a “dead” social media page, or a very low amount of traffic or engagement, it deters people from using them as a point of contact for purchases. People don’t generally trust a page where their last post was a couple years ago, or if someone tries to contact the business through the page and they don’t get a response. It’s important to keep redirected contact information on all pages, even if it’s been shut down. Think about an Instagram page that’s obviously been inactivated and they don’t include any redirections to their website or contact information, people will look elsewhere.
A good technological component of real estate web pages and online presence that puts a business ahead of its competitors, is incorporating the option to browse properties easily and quickly on the website itself. An example of this would be adding the option to tour commercial properties virtually. This provides a great user experience where potential clients can browse available properties and all associated property information even before having to contact an agent, or leaving their homes. Making virtual tours available online is largely dependent on having staff who can integrate this tool into a website, in addition to ensuring it works correctly without lagging or other technical complications. It is also a great addition to marketing notices, campaigns and ads to integrate video components.
It would also be an added benefit to think of adding buttons to directly link to the company’s website, or even better, a link to the property itself. You can include contact information for the agent representing the property and list some important and prominent information about the property. It’s important to include multiple methods of contact for both the agency representative and the company; like phone, email and chat (if available).
Throughout this article, there have been many benefits to using the better, high quality technical tools outlined. When you are in the office, you need a fast and easy means of communication with clients and coworkers. You need high-speed internet to allow for an efficient work environment, even in a large office. Other resources are required to assist with your website, online/email communications and using new marketing tools. Whether it’s by hiring staff who specialize in an area of tech-related software, or ensuring computer equipment is up-to-date, there are a number of ways to utilize new technology to increase business productivity. When employees have access to the latest technology, they end up working more efficiently and using their time to increase overall success of the business. It can be firmly said that having an office space with better technology not only makes the employee’s experience better, but also increases the quality of the clients.
The idea of building “green” has increased exponentially in popularity over the past several years. The concept may initially evoke visions of high up-front costs and following a set of complicated guidelines, but green building is actually well worth considering and is so much more than just a price tag. The U.S. EPA defines green building as, “The practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building’s life-cycle from sitting to design, construction, operation, maintenance, renovation and deconstruction.” The key take-away from that statement is efficiency. Investing some time and energy into your building right now can have long-lasting benefits to both the sustainability of the structure, the environment and your wallet. Let’s look at nine key ways that green building can have a positive impact.
1. Lower Maintenance and Operational Costs
One of the biggest perks to green buildings is the drastic reduction in maintenance costs over the life of the structure. While building green might incur initial charges that are higher than traditional building, these costs are easily recovered over the years. These savings can be largely attributed to the various design elements that work to reduce water and energy use, thus lowering bills by up to a third. Maintenance and operational costs such as these traditionally account for up to 80% of expenses over the lifetime of the structure, showcasing the long-term benefits of this investment. Materials traditionally used in green building are also notably more durable than those that are not. Yes, it may be a bit more costly to build green or to convert your existing property, but the long-term financial benefits speak for themselves.
2. Vastly Improved Indoor Environment
Our surroundings have a huge impact on our overall experience of a space. Green building factors such as improved lighting sources, air quality, upgraded ergonomic features and thermal conditions have been proven to drastically reduce stress levels and increase the quality of life. Work environments that have embraced green technology have produced employees that are much more efficient and happier. According to a 2015 study done by SUNY Upstate Medical School, workers in these kinds of spaces recorded a 101% increase in their brain function and the American Academy of Sleep Medicine reported in 2013 that “employees in offices with windows slept an average of 46 minutes more per night”. This showcases how green building benefits go beyond just individual experience to have a more communal impact. Workers that are happier and more relaxed are proven to have a higher output and will stay at their jobs longer.
3. Saving Water
According to the World Green Building Council, green buildings that have received LEED certification are noted to consume up to 11% less water than those that are traditionally built. This is attributed to the installation of water-efficient plumbing. High-quality water purifiers can also allow green buildings to make use of natural resources, such as rainwater, and to recycle water, as well. This, again, has a significant impact, not only on the building but on the environment, overall.
4. Saving Energy
The World Green Building Council also reports that LEED certified buildings worldwide consume approximately 25% less energy than non-green buildings. Additionally, the Indian Green Building Council (IGBC) has shown that green structures in India can result in a 40-50% reduction in energy costs. Being that these structures are designed to draw energy from natural sources (such as sun, wind and water) over oil and coal, energy use is largely reduced. Just the introduction of solar paneling can save literally thousands over the lifetime of the structure.
5. Better Overall Health for Occupants
Whether living or working in a green building, occupants can experience a lot of incredible health benefits. With the absence of harmful organic materials and plastics that have been proven to release toxic carcinogens into the environment, those spending their time in green buildings are reducing their exposure to many items linked to allergies, respiratory issues and even certain types of cancers. Above and beyond just physical health, mental health is equally as impacted through the implementation of green building practices. In fact, a survey by Cundell determined that the natural elements within a green building created a 16% higher perception of well-being and a COGfx study showed that they performed 131% better when it came to crisis response and working under pressure. The inclusion of natural light in green spaces has also been proven to reduce the onset of seasonal affective disorder (also known as winter depression).
6. Lower Impact on Shared Resources
With the many energy and water-saving features applied to green buildings, builders are fighting back against a multitude of threats to our shared resources. This has global impacts, as well as local, and creates the possibility that we may preserve some of these resources for future generations.
7. Environmental Benefits
The use of sustainable materials and energy sources allows green buildings to reduce their carbon footprint exponentially. UNEP reported in 2009 that this “building sector has the largest potential for significantly reducing greenhouse gas emissions compared to other major emitting sectors”. In 2016, UNEP also relayed that it “has the potential to make energy savings of 50% or more in 2050, in support of limiting global temperature rise to 2 degrees Celsius (above pre-industrial levels)”.
8. Material Efficiency
Green buildings also commit to using as few materials as possible, while still maintaining the quality and integrity of the final outcome. They rely on many recycled and repurposed materials to reduce waste and preserve many natural resources. This also contributes to a reduced carbon footprint and helps to improve the outlook for our environmental future.
9. Long-Term Durability
Lastly, you can’t underestimate the durability of green structures. The sustainable materials that are used to create such buildings have been proven to last longer, on top of all of the other benefits they create. Recycled roofing and decking, for example, can be exposed to the elements for years without needing replacement and with minimal upkeep. Additionally, seeing as they are often not treated with chemicals, they further contribute to a healthy environment, both on the micro and the macro level.
It is quite obvious to see that the benefits of green building far outweigh any perceived detriments. Embracing the idea of building green has impacts that extend beyond just the structure itself, all the way out into your local community and even on a global scale. As more and more builders around the world begin to adopt green technology into their designs, we can expect that these benefits will only continue to grow. It may well be worth considering, even if the upfront costs may be a bit higher.
Many are aware of the benefits of investing in real estate properties. From gaining financial freedom by having a high-income source and being able to expand your assets, investing in commercial real estate is almost always a great idea.
Finding the right property is never an easy task, though. Common variables to consider include the location of the property, the price based on the market and location, as well as the business opportunities that could potentially come about from this new investment.
When looking for a commercial real estate property, it can be a great idea to purchase one in a populous city. With the influx of people, there is a better chance of success, and the return on investment can often be higher. With the increase of activity in the US market post-pandemic, be sure to consider the exciting cities the market has to offer This business venture could be the start of something exciting and highly profitable!
Salt Lake City, Utah
Utah is a unique place to visit, with its mountainous scenery and multiple national parks that are bucket listers dream come true. Salt Lake City, Utah is home to a booming downtown. It’s crowded with both people and businesses of all types and can be a great city to consider when looking for the perfect investment property for your needs. Recognizing the value of collaboration in investment sales is an important aspect for the brokers at SVN ALTA. Based in downtown Salt Lake City, SVN ALTA brokers are experts in the market for commercial real estate investments.
Why Salt Lake City?
As the capital and most populated county in Utah, Salt Lake City has a diverse population. From its rich culture, a popular ski destination, and varying shops and Irish pubs and wine bars, it is easy to see why Salt Lake City is a common destination for weekend trips or for long term living. The opportunities that this city in the Beehive state has to offer are nearly limitless.
In terms of commercial real estate in the exciting city, it has great rates and a high success rate for investors.
What industries are popular in Salt Lake City?
Salt Lake City notably has a lot to offer, but Utah’s diverse economy can be narrowed down to more specific industries. When considering an investment property, popular industries include tourism, mining, agriculture, manufacturing, information technology, finance, and petroleum production. Having these options when looking for a commercial real estate property creates the opportunity for a successful investment.
The uniqueness of Utah can often relate back to its diverse culture and varying population in relation to other large and populous US cities. Salt Lake City is known for a high population of Mormons, which help to contribute to the rich culture of the city, as well as the economic success. The predominant Mormon culture often focuses on delayed gratification and stable families. This helps to contribute to the economic success of the city as a whole.
The people of SLC generally take education very seriously and have a high percentage of college graduates. This can be another contributing factor to the success of the city’s wealthy economic state that has been withheld over the years. Investing in an area of a wealthy population is definitely something to highly consider when looking for a location for a business venture. In comparison to smaller cities, commercial real estate investment properties would typically do better in a larger city.
Post-Pandemic Commercial Real Estate
As the pandemic nears an end or society’s return to the “new normal” some things have changed in the commercial real estate world. While location is still one of the number one factors to consider when closing the deal on a new property, the prices in the market have definitely shifted. As the pandemic led to people fleeing populated cities, the prices have decreased. Now can be a great time to buy because as vaccinations have increased and the Covid-19 crisis has declined, people are likely to return to the cities. Salt Lake City and its location and price positioning makes it an incredible place to buy in the current market. This price decrease makes it the perfect time to buy, and will increase as time passes, so getting in while they are low is important for the biggest return on your investment. With the increase of work from home for businesses, larger buildings are currently being used less. With the eventual shift back to the office, new commercial real estate will be needed.
A common question people ask in the commercial real estate industry is “How do brokers get paid?” Although the payment to a broker is involved with every commercial real estate transaction, it seems many people lack clarity on the subject. Truth be told, the process of getting paid as a broker can get a bit complicated. The fact that commission rates can vary also contributes to the confusion around how brokers get paid. Whether you’re interested in becoming a broker one day or you’re thinking you might want to work with one, this blog post will explain how brokers get paid for their work.
How do CRE Brokers Get Paid?
What many people do understand is that commercial real estate brokers get paid based off commission. The commission is typically paid by the seller of the property, but the buyers of the property may also owe the broker a payment as well. Who pays the commission depends on who the broker is representing in the transaction. When representing both parties, both the seller and buyer will pay the broker a commission fee. If there are two brokers involved with the deal, they will split the commission between each other. However, the amount in which the broker is paid varies due to anti-trust laws.
Due to anti-trust laws, it is illegal to set a commission rate across a market or industry. This means the commercial broker and their client need to negotiate a commission rate before agreeing to work together. Negotiating a price for a commission can be great for both the client and the broker, as the costs of different properties vary greatly. Additionally, some properties are easier to find than others, which changes how difficult the broker’s job is. According to our partners at SVN | Southgate Realty, most commercial brokers get paid between four percent and eight percent of the sale price from the property. However, this may increase or decrease based on the complexity of the deal. So, be sure to consider how hard the broker will need to work when negotiating their commission rate.
How Does Commission Work?
In commercial real estate, a property can be sold or leased. The amount a commercial real estate broker earns is based on the price of the property. So, if the broker and the seller agree on a seven percent commission rate and the property purchased was $1,000,000, the broker would earn $70,000. However, if another broker was involved to represent the buyer of the property, the $70,000 would be split between the two.
For commercial real estate, because leases are typically paid on a monthly basis, there is a different way to calculate the commission of a broker. With leases, the broker is paid based on the length of the lease agreement and the monthly rate. For example, if a property is leased for three years at $15 per square foot, and it is 2,000 square feet, the lease value would be $90,000. We find this from 3 years x ($15 x 2,000 SF). If the seller and broker agreed on a seven percent commission rate, the broker would make $6,300.
How Do Brokers Get Paid on a Lease?
Assume that Corporation X just leased 3,000 square feet to Landlord Y’s Shopping Center. The lease is for 4 years, starting at $15 per square foot with $0.40 annual rent escalations. Here is how you break this deal down.
Year One: $15 PSF x 3,000 SF = $45,000
Year Two: $15.40 PSF x 3,000 SF = $46,200
Year Three: $15.80 PSF x 3,000 SF = $47,400
Year Four: $16.20 PSF x 3,000 SF = $48,600
The total lease consideration from all four years amounts to $187,200. If a broker gets a 6% lease commission for this deal, this percentage is multiplied by the total lease consideration amount. The total commission is $11,232. The landlord and tenant representative brokers split the commission 50/50, receiving $5,616 each. Also assume that the broker gets a 60/40 split with the brokerage firm. The broker then walks away with $3,369.60, or 60%, from this deal.
What Goes Into Sales Transactions?
In most cases there are usually two kinds of brokers involves in a sales transaction. You have the seller’s agent and the buyer’s agent. Commercial real estate sales usually have a longer timeline than what you would expect, so expertise on the property and area should be extensive. There are differences between investment sales and owner occupied deals. Sale transactions involve the title, inspections, environmental conditions and entitlements. It is important to note that closing on a commercial real estate sale cannot occur under 60 days. It will often take 3 to 6 months until all parties reach an agreement.
Brokers that represent sellers will have a pre-negotiated listing agreement in place with commissions already revealed. Commissions from a sales transaction will range from three to six percent, but it isn’t uncommon for sellers to only pay their own brokers, and not the buyer’s broker, on larger investment sales. In this scenario, commissions may be lower, such as 2%.
Do Independent Contractors Have Advantages?
It must be understood that most commercial real estate brokers will work as independent contractors. This means that they are contracted employees. They have a written contract in place with a brokerage company and will be paid accordingly as a W-9 employee. However, the brokerage firm will not withhold taxes, holding independent contractors responsible for addressing matters related to the IRS. These matters include taxes, social security, medicare, and health insurance. Independent contractors are self-employed, though the brokerage firm will still have significant input.
The relationship between brokers and independent contractors must remain steady. If both sides correctly follow the terms of the Independent Contractor Agreement for Sales Associate (TAR 2301) and the Statement of Understanding (TAR 2302) they can reduce their risk of facing penalties from the IRS. The rights and obligations of a broker and an agent will be defined by the Independent Contractor Agreement. Provisions that clarify the agent is not an employee will be outlined in this document. The agent must agree to terms provided in the Statement of Understanding, which will help legally confirm the independent contractor relationship. It is recommended to annually complete this document to reaffirm between brokers and independent contractors.
Should You Have a Tenant Representative Broker?
If you are looking to save money by acting as your own representative in a real estate deal, then you will be disappointed. If you do not have a tenant representative broker before going directly to the landlord, you can expect the end result to be the landlord saving money and you losing money. Without expert knowledge of the market or the many traps that are part of commercial leasing, the landlord can manipulate negotiations and take advantage of you. Tenant representative brokers guide you through the process of finding property space and will negotiate with the landlord for the best deal that works for you.
What Is the Broker Opinion of Value?
If you know how appraisals work, then you will discover that a Broker Opinion of Value (BOV) is very similar to an appraisal. An assessment of a property’s value is known as an appraisal, which analyzes the condition of the property as well as its amenities, location and comparable sales in the area. A Broker Opinion of Value is a general estimate of value for a single commercial property. Investors, property owners, lenders, accountants and real estate attorneys are just some of the real estate professionals that will use a BOV. The level of a BOV ranges from a simple document of two to three pages to a more complex book of 40 to 50 pages. Brokers can get paid by banks anywhere from $250 to over $1,000 to publish an opinion of value on a property.
Who Pays the Broker?
The person who usually pays the broker(s) involved with commercial real estate transactions is the property owner or landlord. Almost always, the seller or landlord will pay both brokers who are representing clients in the commercial real estate transaction. This is because the landlord wants to get the property off their hands and needs the help of the broker to do so. If you are looking to purchase a property, do not skip out on using a broker because you think you will get a better deal. Brokers are very resourceful, and you typically won’t spend any money on their services when you are buying the property.
Looking for a Commercial Real Estate Broker in Salt Lake City?
We hope this blog post cleared up any confusion you had about how brokers get paid. If you are looking to buy or sell a commercial property in Salt Lake City and need assistance from a broker, please feel free to contact us. Our highly skilled and experienced advisors will help you get an excellent deal and can answer any questions you may have. We always strive to make the transaction process as easy as possible for our clients. So, please feel free to reach out so you can work with one of our advisors today!
Thinking of investing beyond residential and retail real estate? Try industrial property investing! Industrial properties are large allotments of real estate and infrastructure that are used for a variety of warehousing, manufacturing, and commercial purposes.
And they make excellent investments for a multitude of reasons. Almost everything we use on a daily basis—food, shampoo, clothes, laptops, showers, ovens, toys, bikes, cars, and so much more—come from industrial properties!
Industrial properties are stable investments for two reasons. The first reason industrial properties make sound investments is because they cater to a variety of applications. Some popular uses for these spaces include manufacturing and production, distribution, retail, and office space. Whatever your industrial investment goals or needs, there is definitely an existing space to help you get started.
The second reason that makes industrial properties excellent investments comes from the perpetually high supply and demand for industrial processes and employment. With food, sanitation, and infrastructure at the heart of every city and suburbs, there will always be a huge workforce ready to rent and run industrial projects on your site.
If you’re thinking of purchasing an industrial property, this article is for you. We’ve compiled a no-nonsense guide to industrial properties to help you exactly what you need! Read on to learn about 10 critical factors to consider with industrial properties.
1. The Industrial Property Class
Knowing the class of an industrial property will give you surface-level insights to the value of the investment at hand. Industrial real estate is graded with an A, B, or C classes according to their age, condition, and location. Classes are also graded according to the social and economic factors and predictions of the property’s location. Property classes can help you manage your expectations when it comes to planning for future renovations, tenants, and business traffic. Take a look at each class and how its grade pertains to the property quality.
Class A Industrial Property
Class A Industrial Property is the highest grade of industrial property. In this class, you will find the most expensive, pristine, and desirable properties. Class A real estate is new or recently renovated, is in excellent physical condition despite its age, is situated in a great location, and is bustling with economic activity. These types of properties generally rent to high-earning tenants in locations that experience very low vacancies. It is common for these types of properties to be professionally managed.
Class B Industrial Property
Class B Industrial Properties are secondary to Class A when it comes to age and/or quality of the property. Class B properties may be older, may contain less desirable amenities, and may be situated in less economically active locations. The tenants in this property grade generally earn less than Class A property tenants. Although it’s more common for these properties to managed by retail investors, professional management is not unheard of.
It is important to note that Class B properties can be re-graded to Class A properties after renovations. Some investors apply to rezone these properties during the renovation process as mixed-use real estate to hedge their risk and expand their application. The practice of rezoning industrial properties is common in emerging cities experiencing booming population and economic growth.
Class C Industrial Property
Class C Industrial Property score lower in all possible grading factors compared to Class A and B properties. Class C properties are almost always old—at least 20 years or older—and are inferior in physical condition and amentitiy availability. Class C real estate is located in rundown or undesirable areas. These types of properties need a lot of maintenance, renovation, or in some cases, complete remodels. These types of properties have high vacancy rates and low-income tenants.
If at first you are dissuaded by this property gradeI, we urge you not to overlook Class C properties. These types of properties may be promising investments for seasoned real estate investors looking to cataylze growth in a particular area. Just like Class B properties, Class C real estate can be re-graded, although they will require larger time and financial investments.
Lastly, this type of property may prove advantageous for a real estate investor who owns and operates their own business. If you intend to conduct your own business on the property, you don’t have to worry about renovations, resale value, or rental value right away. You can forego a lot of renovations and run your business as you please.
2. The Industrial Property Type
Just like how there is a class associated with each industrial property, there is also a type associated with each property. Industrial properties are classified into 8 types according to their physical condition, layout, and amenities. The type of industrial property will dictate the types of tenants you will rent to, as well as the businesses they own. Here is a quick overview of the different types of industrial properties.
Bulk Warehouse Properties
Bulk Warehouse Properties are massive plots of land with lots of building square footage. Bulk warehouses are used for storing for inventory. They have high ceilings for installation or movement of large equipment. They can also have many delivery ports for trucks, trains, trailers, or planes.
Flex Warehouse Properties
Flex Warehouse Properties are a lot like bulk warehouses, except they are generally smaller in overall square footage and ceiling height. The main difference with flex warehouses is they can serve several applications in addition to storage, such as manufacturing, office space, and more. These types of properties are great for start up companies, small companies, etc.
Heavy Manufacturing Properties
Heavy Manufacturing Properties are intended for ongoing, high-capacity productions. Heavy manufacturing real estate often has heavy-duty manufacturing infrastructure built into the building. Such infrastructure includes electric power sources, water lines and filtration, ducting and ventilation, storage tanks, and exhaust. These facilities may or may not come with built-in production equipment like cranes, production lines, lifts, compressors, and more.
Light Assembly Properties
Light Assembly Properties are used for assembling products made on heavy manufacturing sites. Light assembly properties are a less intense version of heavy manufacturing properties. They may have comparable infrastructure and tools, but these properties focus more on assembling ready-made components instead of processing raw materials. This type of property tends to have less production machinery and instead more quality-checking, packaging, and distribution equipment.
Cold Storage Properties
Cold Storage Properties refer to large facilities with freezer and refrigeration spaces. This type of real estate is mostly used for food storage and distribution, but can also be used to store other perishable goods. Like warehouses, these types of properties tend to have many ports for various types of delivery vehicles.
Telecom and Data Centers
Thanks to cloud computing, e-commerce, and data security, Telecom and Data Center Properties are a booming type of industrial real estate. Telecom and data centers are enormous properties equipped with large-scale electrical, power, and ventilation systems to maintain an optimal environment for computers, servers, and electrical equipment.
Industrial Showroom Properties buildings are a unique amalygmation of retail inventory and display. These spaces are commonly rented to tenants that sell and store large retail equipment like gun cases, refrigerators, furniture, and more.
Research and Development Space
Another great type of industrial investment property are Research and Development Properties. Research and Development properties are expected to remain in high-demand as software, computing, and electronic technology continues to be popular. This real estate appeasr similar to flex warehouses, except they usually are situated in large campuses or parks with landscaping and huge parking lots. Research and Development may have specialized equipment built-in or incorporated onto the property, such as computers, servers, or laboratory equipment.
3. The Industrial Property Location
This aspect is an extension of the class and type of property that really needs a lot of consideration. Location plays a huge role in the current and future value of your property, as well as the future success of the business that will take place in your industrial property.
It is important to the logistical factors of location, like nearby employers, workforce, industry supply and demand, and projected economic growth.
It is essential to research the economic activity and expectations of the area by which your property resides. Understanding the growth and activity of the local economy will give you an idea of how future construction and infrastructure projects will affect prospective tenants, customers, and employees who need to travel to your property. Informing yourself of the infrastructure and nearby construction will also give you realistic insights regarding how your suppliers, customers, tenants, or employees will reach your facility.
To contrast considering how the local economy will affect the value of your property, we urge you to think also about your residential neighbors. Consider how your industrial business may affect nearby residences, if any, as well as natural habitats.
4. The Condition and Maintenance of the Industrial Property
These components are also extensions of the class and type of industrial property that need in-depth consideration. You will need to assess the class and type of your industrial property to ensure your property will be a responsible, safe, and productive place to conduct business. In addition to knowing the amounts you’ll have to pay for routine care, you’ll also have to have an idea for how often you’ll need to maintenance, inspect, lease, and renovate your property. Just remember—keep a detailed log of all the work done to your property. Having thorough records will help you through future instance claims and appraisals.
5. The Legal Implications of the Industrial Property
There is an endless number of legal issues to consider before purchasing an industrial property. Identifying the class and type of the property will help you out a lot when it’s time to legally safeguard yourself with code renovations and industry-specific insurance.
To eliminate the chance of future lawsuits, set yourself up for success by assessing the safety conditions of your workplace. Some common legal issues associated with industrial properties include ADA compliance, as well as noise, light, or environmental pollution.
Before renting out your industrial site, ensure your property is up to date with American Disabilities Act codes and regulations. This is a simple, but huge way to avoid the headaches of a discrimination lawsuit.
And when it comes to pollution of any kind, you need to perform your due diligence by inspecting the machinery, refuse, and sanitation processes of your facility. Performing noise and light pollution due diligence means considering the type of tenant you expect to lease to and how their productions will affect the surrounding residential quality of life. Note there may be noise and light ordinances in place where your property may be located. Performing environmental due diligence means informing yourself of the property’s past usages and any possible environmental accidents such as chemical spils. Your job afterward would be to complete any cleanup or renovations that would prevent further environmental harm.
6. Industrial Property Taxes
Property taxes are pretty straightforward and easy to calculate for a given area, but it does require some initiative on your part. You can investigate the property taxes of your city by exploring the local government’s website.
In short, the local government will assess the value of your industrial property and tax it accordingly. This brings us back to how crucial it is to understand how the class and type of an industrial property affects its value. A property that is overvalued with accrue high property taxes, and inversely, an undervalued property will have lower property taxes.
An interesting and sometimes overlooked aspect of this is tax breaks for your industrial property. There are several cases in which your property could benefit from a tax break, including depreciation deductions, non-mortage deductions, and more.
7. Industrial Property Insurance
Considering the many use cases for industrial property, there is no doubt you will need at least one type of insurance for your property. Whether it be manufacturing, storage, or research and development, there is always the chance for something catastrophic to happen. Survey the types of insurances you are required to have as well as the types of insurance available to you. You’ll need to carefully determin the amount of coverage you need for the land, building, and machinery located on your property.
Some common industrial insurance packages include fire, flood and water damage, electrical outage, machinery accident, lessor’s risk, commercial property, and commercial general liability insurance.
And just like with condition and maintenance tasks, don’t forget to keep a record of any renovations and maintenances to fulfill insurance qualifications.
8. Industrial Property Loans and Financing
A loan for an industrial property has specific processes and requirements that differ from other real estate loans. For example, an industrial property loans are typically given to business entities with a loan-to-value ratio between 65% – 80%. Industrial property loans also have widely-varied repayment lengths with long-term amoritization schedules. Of course, there are other aspects particular to industrial property loans that will require further investigation.
9. The CAP Rate of the Industrial Property
Taking all of the above factors into account will give you a very realistic insight into the CAP rate of your industrial investment property. The Capitalization Rate (CAP rate) of a property refers to the financial returns you expect to receive from your real estate investment. If you plan on investing seriously in industrial real estate, you’ll want to consider properties that have promising returns given the value, location, and market demand for the property. You can calculate this rate using a CAP rate calculator. This calculation will take into account the revenue, expenses, vacancies, and value of the property.
10. Your Risk Tolerance
Now that you’ve assessed all the possible factors concerning industrial property investments, it’s time to take a realistic look at your own risk tolerance. Industrial properties are large capital investments that can easily be destroyed by in-house accidents, natural disasters, lawsuits, or financial mismanagement.
For every dollar you decide to put into an industrial property, ask yourself if you are willing to lose it. If the answer is yes, proceed with caution. If the answer is no, consider investing in another, perhaps less risky type of real estate, like duplexes, AirBnBs, or real estate investment trusts (REITs).
Industrial properties are an exciting venture, but require lots of planning and a thorough understanding of the local economy, industrial use, and financial responsibility. We hope this article has helped you cover your bases when it comes time to consider a future investment in industrial real estate.
Feeling safe at work should be a must! Workplace safety “refers to the working environment at a company and encompasses all factors that impact safety, health and well-being of employees.” For both building owners and tenants, safety should be of the utmost importance. But how can you be sure that this is true?
In commercial spaces, sometimes this can, unfortunately, end up lower on the priority list. Let’s be sure this isn’t the case! Of course, no one wants for it to happen, but it’s best to be prepared for the worst of scenarios. Here are some helpful tips for workplace safety.
Find People Who Will Respect Your Building
When talking about workplace safety, a critical aspect to consider is people. As a building owner, it is absolutely crucial to find tenants that will respect the workplace. Because your tenants will be in the space without your supervision, you need to trust them. So, do your due diligence and make sure your tenant is trustworthy and ask your broker for their opinion about the tenant. Experienced brokers have seen it all, and they can give some insight on if they think a company would be a good tenant.
On the other hand, as a tenant, be sure you find employees who will respect the space as much as you. After a few years in a space, a bit of wear and tear is normal. But, employees need to understand your company is leasing the space and help you by keeping the space in order.
Cleanliness is Key
When an area is dirty, more germs and dust can be in the air. This can be harmful to the occupants. This can create a stuffy environment that may be hard to concentrate in and can increase illnesses. So, as a building owner, it’s important to either hire a cleaning crew, or require your tenants to clean their space themselves.
As a tenant, we recommend adding hand sanitizing stations around the office, warehouse or mixed-use space. Right now, germs are definitely a top concern for employees who come to work. So, having hand sanitizer readily available can be a great workplace safety precaution. Also, making sure soap dispensers are always filled is important as well.
Cleaning Up Clutter as a Tenant
When an area is cluttered, it is more likely that someone will trip or injure themselves. With injury comes complications (like lawsuits!), so it is important to maintain clear pathways. Stowaway any unnecessary items and provide employees with the proper workspaces.
Pro tip: Clean as you go! Whether it’s another day at the office, or the floor is being remodeled, never leave the clean-up for just the end. By maintaining it throughout the day or project, you are ensuring that it will never get out of hand. This provides safety for everyone that is occupying the space.
Provide Proper Equipment for Employees and Tenants
Depending on the role and industry, an employee may be required to operate tools or equipment. They should be provided proper training for all aspects of their job, but it is crucial for them to be comfortable using the equipment. This can help maintain a safe workplace. As a tenant, use this opportunity to give the employees proper training. It can help deem the workplace as a safe one and avoid any troubles. Other employees will also feel safer knowing that their colleagues are properly managing their equipment. This is only half of the battle, though. Employees need to be sure they are using the correct equipment for the job. If they need a tool that they don’t have access to, effectively communicating this to their managers can help. No employee should be asked to complete a task without the proper resources. It not only creates tension but can make an unsafe environment.
Workplace and Equipment Safety For Building Owners
As a building owner, specifically for warehouses and mixed-use spaces, it may be in your interest to make sure any equipment is properly functioning. Even if your tenants have proper training, broken equipment can cause significant injuries. So, before switching tenants, consider getting an inspection done on any equipment you have in your space. Whether this be an automatic garage door or production line equipment, make sure it’s safe for your tenants.
Fire Safety Tips
Fire drills seem to always come at the most inconvenient of times. Right before that important meeting, while you settle in after lunch, or as you make that extra cup of coffee midday. Still, these are the simple procedures that can really make a difference when it comes to safety in a corporate building.
Unfortunately, a fire can start in an instant, and completely inhibit the safety of employees. Buildings should be up to code and inspected by fire safety professionals frequently. As a building owner, this is a highly important task for you. If your building doesn’t have the necessary number of fire exits or there are fire hazards, you may be putting your tenants at risk. So, contact a fire safety professional to inspect your property as often as necessary. We recommend making sure they are certified by the National Fire Protection Association before hiring them.
Workplace Safety For Both Business Owners and Tenants
There is definitely a lot to consider when it comes to workplace safety. In this instance, it is best to be over-prepared. Safety is never a joke and isn’t something that should be taken lightly. In commercial spaces, a lot can go wrong. By following these tips and creating a plan to make sure everyone is on board, whether they be your employees or your tenants, will keep people safe.
One of the great challenges for commercial retail spaces in 2021 is finding ways to get customers in the door. Whether restricted by social distancing mandates or simply stymied by an online ordering culture, brick-and-mortar businesses are facing challenges in attracting customers like never before. To continue to thrive, retail spaces must find ways to add value to the consumer experience above and beyond the products and services they house.
Fortunately, there are a number of trendy exterior renovation projects that can boost foot traffic in a retail space, creating the competitive advantage for which SVN has been known since 1987.
1. Simplify the Signage
Customers in 2021 have notoriously fickle attention spans. They do not want to spend time looking, reading, and thinking before making a decision. They want to see it, make their decision, and go on with their lives.
If a store features hard-to-read fonts and text-intensive messages as part of its permanent signage, consider simplifying this to something more digestible for a crowd that is likely to offer a cursory glance, at best.
Spend time developing a simple logo and brand and incorporate this as the focal point of the signage. When thinking about logos, ask the question: Would this make a good app icon? Subway and Best Western are two major retail chains that have recently modified their logos to be more app-friendly, with signage at physical locations being updated to match this change.
2. Add Some Architectural Decor
Although customers like the consistency of a simple, recognizable brand, there is something to be said about using individual creativity to catch the attention of passersby. The country is in a bit of a DIY renaissance, with custom craftwork and artisanship in high demand, so features that can make a business stand out in the midst of a cookie-cutter crowd can be beneficial.
Some creative decor ideas that can spruce up a retail space’s exterior include architectural grilles, ornate columns, and/or artwork made of recycled metals or other sustainable materials.
3. Improve the Parking Lot
A parking lot that feels unsafe, illogical, or is in a state of disrepair will be a major deterrent to foot traffic. Freshly landscaped islands, filled potholes, angled spaces, and re-painted space lines are all great ways to make a parking lot more inviting, an important first step in getting customers in the door.
4. Give Customers a Look Inside
Using a large display window or wall not only allows customers to see product offerings, but it can be influential in creating an open and inviting atmosphere that appeals to passersby. As contemporary retail shopping needs to be more of an experience than a buy-and-sell transaction to appeal to modern customers, giving customers the ability to look inside and see what value a business can add to their lives should be a primary consideration.
5. Make Accessibility a Priority
An important aspect of increasing foot traffic is making sure that a business can accommodate all potential customers. Without ramps, handrails, and benches to assist disabled clients, a business is immediately eliminated from consideration by this demographic.
6. Install an Automatic Door at the Entrance
Automatic doors make customers feel like they are getting the red carpet treatment. In addition, the accumulation of germs on door handles has gotten a lot of attention during the COVID-19 pandemic, so this small renovation can help make customers feel safe by ensuring a contactless entrance.
Getting customers in the building will be a riddle that contemporary retail spaces must continue to solve to remain relevant in 2021 and beyond. By using the six exterior renovation ideas listed in this article, businesses can increase foot traffic at their physical locations to secure the competitive advantage for which SVN is known.
Matt Lee is the owner of the Innovative Building Materials blog and a content writer for the building materials industry. He is focused on helping fellow homeowners, contractors, and architects discover materials and methods of construction that save money, improve energy efficiency, and increase property value.
This is the second half of a two part series on 2021 Commercial Real Estate Predictions and Insights. You can find the first half of this series here: 2021 Commercial Real Estate Predictions and Insights
Insight 4: An Industrial Real Estate Explosion
Whether it’s a retail conversion or new construction, there’s going to be a massive need for industrial real estate. With e-commerce being the top choice for shopping, we expect to see at least 250 million commercial square feet dedicated to industrial space in the coming years. According to CBRE, $1 billion in e-commerce revenue necessitates a need for 1.25 million square feet of warehouse space. So, all major cities will need expansive warehouses for packaging, storing and shipping consumable goods.
Prediction 4: Industrial Real Estate
Spacious, gateway areas close to ports and bustling cities (particularly in the southwest and southeast) are expected to see a surge in commercial industrial conversions and population growth. Population growth will likely boom with the onset of industrial expansion and greater job availability. But, it should be noted physical labor alone cannot accommodate the anticipated burgeoning growth. To maintain efficacy, streamline productions and reduce operational costs, industrial real estate lessees will depend on autonomous robots, software scheduling and updating and virtual security.
Insight 5: Socially Distanced Multifamily Living
In 2021, affordable housing is at the forefront of everyone’s mind. However, this won’t halt the demand for multifamily living. This year we anticipate multifamily investments to increase by 33% with over $148 billion in revenue. Shelter-in-place mandates made urban cities unappealing for many. Urban areas have turned into undesirable locations that suffer from high rent, high-cost public transportation, and other costly downsides. Additionally, dense populations often have inadequate indoor and outdoor space to social distance. When it comes to amenities, there are many unavailable or unusable entertainment “amenities” like restaurants, theatres, venues, etc.
After feeling the pent-up effects of the lockdown, many city dwellers (who likely work remotely now) have packed up and moved to less dense, suburban areas where they can stretch, relax in ample space. This is mostly to enjoy the natural amenities for the time being. Seeing many cities are not completely abandoned, multifamily investors working to retain tenants need to prioritize community engagement after the pandemic is over. Hopefully, this will make up for emotional connectivity and urban romanticism lost from in-person interactions.
Prediction 5: The Modern Multifamily Experience is Virtual
Multifamily investments in suburban and rural areas will likely grow as remote employees no longer need to live close to their work headquarters. For example with Salt Lake City, areas like Layton and Bountiful will likely be desirable locations. This is because they’ll offer affordable housing solutions that also await industrial prospects like warehouses and distribution centers.
While social distancing remains in effect, virtual engagement in the form of mobile apps will be a must for urban and non-urban multifamily complexes. App initiatives like polls, rewards programs and virtual meetups instill a sense of connectivity.
According to Deloitte, companies can continue to improve the value and connectivity of their assets. This can be done by “deploying smart building design and maintenance capabilities and offering more relevant services to tenants and end-users”. Such services include:
- Tenant-predictive analytics
- Smart-building technologies
- 3D property visualizations
- Facility and maintenance monitoring systems
Insight 6: Socially Distanced Vacations
While the demand for hotel and vacation space is steadily increasing, it’s going to take a while for hotel investments to return to pre-pandemic volume. The public is anxious to relax somewhere that’s not their home. But, they are also hesitant to vacation in once-popular, high-traffic areas. The rate of recovery for hotel occupancy is closely tied to the distribution of the COVID-19 vaccine.
For now, drive-to destinations like campgrounds, parks and natural attractions are popular alternatives to hotel stays. Interestingly enough, rural and interstate hotels do not have any issues with vacancies, compared to their urban counterparts.
Prediction 6: Hotels Will Have to Wait
While all varieties of hotels have experienced some form of loss from 2020 vacancies and closures, economy vacation real estate experienced the least amount of disturbance. We expect economic vacation investments to continue to face the least revenue, unfortunately. Additionally, we expect vacancy and recovery hurdles when compared to their upper-scale and luxury counterparts.
Hotels in urban areas that rely on business travel are expected to recover the slowest. Fortunately for urban, upper-scale and luxury hoteliers, business recovery is predicted to experience the sharpest incline of revenue per available room. However, this is once vaccinations are widely available. In the meantime, hotels can work on boosting their competitive edge by investing in the future of hotel vacationing with technology. Some desirable technological integrations are mobile apps and virtual on-demand entertainment.
Insight 7: The Reign of Colocation Centers
If you’re looking for a long-term, dependable commercial investment, consider colocation. E-commerce, cloud servicing and online content consumption are crucial to our workplaces, shopping experiences, living arrangements and vacation plans. Commercial real estate has a definite need for server and hardware storage to host all these vital services. So, it’s no wonder data center REITs are becoming a popular commodity within the commercial real estate market.
If you’re looking to sharpen your competitive edge, you should know enterprise companies want to maximize power and efficiency by looking for data centers with “clean energy” initiatives. Providing secure, stable, clean and environmentally-conscious data storage environments may be more than a marketable feature. Furthermore, it may also be tax-advantageous.
Prediction 7: Data Centers Aren’t Going Anywhere
We anticipate colocation tenants to look for flexible short-term leases in the foreseeable future. However, with online and cloud technologies driving innovation, commerce and networking, we assume they will eventually buckle down into long-term leases. These will likely be in affordable, budding, rural cities.
Our 2021 Commercial Real Estate Predictions
There’s a lot of promise for 2021 commercial real estate predictions. So, whether you’re looking to buy your first commercial real estate, improve your existing real estate assets, there’s sure to be an opportunity in the coming year. If you have any other questions, please feel free to contact our team. The SVN Alta team is here to help you so you can make a smart investment or have a great sale.
After the 2020 peak of the coronavirus pandemic, the commercial real estate market is ready for positive change and growth. This year, we expect to see auspicious changes within office, retail, industrial, multifamily and colocation spaces. All of these rely on investor abilities to adapt their spaces and services using technology. In this two-part series we are sharing seven exciting insights for 2021 commercial real estate predictions based on CBRE’s and Deloitte’s Market Outlook reports. In this first part, we will cover the first three insights. Part two will be published on February 11.
Insight 1: 2021 Commercial Real Estate’s Technological Leap
Almost a year after shutdowns went into effect, many remote companies are still figuring out how to balance home and work life. With the coronavirus still looming in our everyday life, social distancing, thorough sanitization and virtual connectivity remain a top priority among investors. Not to mention, these are priorities to employers and employees. With vacancies and short-term tenancies abound, investors are looking for ways to increase the value and attractiveness of their assets. This is all while recovering losses from the previous year. In an effort to reduce inefficiencies, streamline processes and cut overhead costs, commercial real estate investors are virtualizing many in-person tasks. Such processes include the digitization and automation of property tours, access and security. Additionally, this helps with amenities and industrial jobs.
Prediction 1: Commercial Real Estate Needs Tech to Thrive
Commercial real estate companies will accelerate their use of technology within their assets to improve tenant experiences, overhead processes and building maintenance workflows. Such improvements include the integration of mobile apps and cloud-based tools. These will help improve tenant experience and assist property managers.
Insight 2: Rethinking Office Space
In 2020, we observed a multitude of businesses shift to remote workflows, with commercial office investors racing to keep up and offset torrential losses. For 2021 commercial real estate predictions, the modern office space stands between the crossroads of flexibility, functionality and quality. According to Deloitte, companies are “incurring higher operating costs because of the additional health and safety measures they are implementing . . . operating costs could increase by at least [$19.4] per square foot.” This equals 5.8% of the average annual office rents at the beginning of 2020.
Flexibility with 2021 Commercial Office Space Leasing
When it comes to 2021 commercial real estate predictions around office space, investors should be cautious. As vaccinations roll out and public fear of the pandemic diminishes, companies are rethinking how and when they will use office spaces. The lockdowns and shelter-in-place mandates of 2020 showed many companies their employees don’t need a full-time physical workplace. Still, companies realize they need a physical workspace to promote company culture, host innovation meetups and conduct critical face-to-face meetings. To future-proof their assets against long-term vacancies, investors and tenant companies alike will need flexible leasing terms. Ultimately, this means increased rent rates and short, shared lease terms.
Multi-Concept Office Functionality
Considering the shared nature of flexible leasing, offices need to be adaptable for use by a variety of companies. Investors are looking for new ways to maximize the use-case potential of their office spaces by creating simple, modular offices. If a commercial office investor wants to make the most use of his or her asset, they should aim to address the needs of multiple industries. But, these should include with accessible, shareable spaces.
Enhanced Office Quality
In a time where remote work blurs the lines between work and home life, companies are also rethinking teamwork processes to design cohesive culture across remote teams. Among all the types of spaces, Class A properties will have the most demand for quality improvements. Commercial office investors can attract lessee companies invested in their employees’ wellbeing. Typically, this can be done by enhancing their offices with modern, clean and premium amenities. After a pandemic, such features include:
- Rigorous sanitation schedules
- Impeccable, monitored air-quality
- Open, airy rooms with lots of light and sunshine
- Contactless food and beverage stations
- Contactless office tools
Prediction 2: Vacant Office Spaces Rebound by Catering to Company Culture Initiatives
Dense cities with tech firms like San Francisco and New York are expected to see a continued decrease in demand for office space since employees are working remotely and moving to more affordable areas. Despite the increase in remote employees, suburban commercial office usage is still expected to return to pre-pandemic normalcy as communities restabilize. However, urban areas will rebound at a slower pace than the suburbs. In order to stay relevant and desirable, office companies must present their locations as safe hosting options for team-building and collaboration across a variety of industries.
For 2021 commercial real estate, we expect to see commercial office space scale the quality and use-case potential of office spaces with a multifunctional design. The most notable changes in office space for 2021 concern future leasing flexibilities, rent increases (to compensate for flexibility and 2020 losses), and contactless technological amenities.
Insight 3: Retail’s Mixed-Use Pivot
The most interesting commercial real estate evolving during this period is in relation to malls. Before 2020, many retailers were already shifting to e-commerce platforms. Additionally, malls were already undergoing a rapid decline in popularity. Then, the virus forced lagging retailers to adopt the e-commerce models or go out of business.
Malls are immensely promising commercial ventures for urban areas. However, converting them into mixed-use spaces requires a good amount of zoning law workaround. For investors, mall storefronts may need to adjust their usage to improve community engagement to combat the losses and costs incurred by storefront vacancies and rent drops.
For urban-dwellers, converting malls into community spaces like medical, grocery, recreation and cultural centers is an opportunity to address the growing demand for essential retail and housing, as well as create a safe gathering place to combat the isolation of social distancing. Some quick, adaptive features malls can put into effect immediately include:
- Contactless shopping flows like self-service checkouts
- Contactless entry and exit points
- Sanitation stations
- Delivery services for essential goods
Prediction 3: Urban Malls Repurposed and Suburban Shopping Resumes
There will be a decreased demand for retail space in dense cities and a moderate to large demand and growth for retail spaces in suburban areas. The difference in growth is largely due to the available amount of living space and population density.
Retail spaces in urban areas are expected to convert into essential retail storefronts within the next couple of years. With more room to spare, suburban areas should expect to see a natural rebound for all types of retail spaces, particularly experiential storefronts like shopping and dining throughout the year. There is no estimated timeline for malls to convert into mixed-use properties. Due to its complexity with zoning and local ordinances, it may be a long process that may outlast the hotel industry’s comeback (more on hotels starting at insight 6).
… Visit our blog again on February 11 to read the second half of this series. …