Tracking the market is a task that consumes some of our time as commercial real estate professionals.
It’s a fancy way of saying “what’s happening” in our commercial real estate world. We look at things such as comparable lease transactions, comparable sale transactions, number of new availabilities and the number of months needed to complete a lease or sale once the property enters as an availability.
By analyzing these metrics, we’re able to gauge the health of our business. New avails and time on the market are easy enough.
The measures more difficult are the comparable sales and leases as you must factor in some equalizer. By this — and using housing as an example — you wouldn’t compare the price a 10,000-square-foot beachfront property to an inland condo without some means to level the comparison. Price per square foot helps along with age of construction and amenities.
We’re then able to suggest a status of comparable, inferior or superior. If we get quite granular, we can propose a percentage by which a comp is superior or inferior and add or subtract this from the sale price.
Lease comps are trickier. Leases are different from sales comps as they are not a matter of public record. In other words, we can’t go to the county recorder to see where a deal traded. We must rely on relationships with fellow brokers, who will share the points of a lease with us.
Important things to consider:
The starting rate: Defined as the lease amount the tenant pays upon commencement of the lease.
Operating expenses: In certain leases, an amount – in excess of base rent – is billed to the tenant. Operating expenses include costs such as property taxes, building insurance and maintenance.
Annual increases: These are bumps in the lease rate that occur annually, or at some other throughout the term. Most leases these days are written with fixed annual increases versus the change that occurs in the consumer price index which we frequently saw in the 1980s.
Term: Number of months that the tenant commits to pay rent.
And concessions such as:
Refurbishment: Generally referred to as rent, ready items, such as paint, carpet, and general cleanup. Not typically included in refurbishment, would be tenant specific improvements, which are referred to as tenant improvements.
Free rent: This period is and the tenant gets to occupy the building free of base rent.
Beneficial occupancy: Any occupancy granted prior to the commencement of the term is referred to his beneficial occupancy, and sometimes may be called early possession.
Improvements made for the tenant: As mentioned above in the refurbishment section, tenant improvements would be outside the scope of the normal cleanup. This could include things such as adding offices, or upgrading the power panel.
If a fellow broker is willing to share all the points above, we can then do some math and compute what’s known as the effective rate. Simply stated, the effective rate considers rent (including increases) over the term, minus the concessions.
The actual computation is a bit more complex. But you get the idea.
Now, armed with the effective rate of each lease, we can assign the same — inferior, superior, or comparable tag used for sales comps — based on amenities.
As an example, a new Class A offering should be superior to a 30-year-old counterpart.
How superior you may wonder? In certain cases, the 30-year-old address may be functionally obsolete to modern occupants and may need to appeal to a smaller pool of tenants who don’t need Class A amenities.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
