Commercial Real Estate
If you think about it, there really are only two facets to dealing in property; the people, and the properties. Everything falls into or between these. So let’s begin your entrance into the world of commercial real estate (CRE) and take a deeper look at both of categories.
Many people who are commercial developers have a background in brokerage. While there are many similarities, the largest key difference between the two is that emotions play a much smaller role in commercial real estate as compared to residential real estate. Buyers, sellers, tenants & landlords are much more motivated by profit than by individual preferences. Of course, commercial real estate transactions are often much more complex and take longer to complete as well.
Now, let’s consider the major players involved in the commercial real estate industry:
The Major Players
Real Estate Brokers
As anywhere else, the job of the broker here is to find and facilitate a transaction between a buyer and a seller. Most who play this role in CRE call themselves brokers, however, this is not necessarily 100% accurate as some people hold a broker’s license, while others hold a salesperson license. Brokers working for buyers, more often than not, need to find properties suitable for purchase outside existing MLS listings. Whereas brokers working to sell a property need to target a high niche segment of buyers and investors. As commercial real estate transactions are quite complex, brokers may or may not be involved in the entire spectrum of the transaction. Additionally, they may or may not refer other professionals during the course of the transaction.
The key thing for residential realtors to realize is, that their previous buyers may prefer to deal with or through them, rather than a commercial real estate broker who they don’t know. Thus, it is highly recommended for residential realtors to joint venture with or refer to a commercial broker who has the experience….. that their clients can be served without losing business or relationship value. (Let us know if you are looking for tips on evaluating the right commercial real estate brokerage to associate with and how to negotiate with them, we will have an article on that soon.
Plus, it is crucial to note that the Code of Ethics laid out by San Diego’s Association of Realtors ® (SDAR) recommends against brokers practicing beyond their expertise. For more details, refer to their publication here.
As with any real estate transaction, finance needs to be secured. While most buyers have their own source of financing, the broker needs to have relationships with various types of lenders; construction, acquisition, equity and permanent. These relationships are useful during preliminary valuations and can also be crucial in enabling financing of the final transaction.
Just like most commercial real estate players, it’s important to have a lender who specializes in the product type you are dealing with.
Architects, Engineers & Planners
During development and redevelopment (and sometimes even leasing) buyers may need the assistance of any of these professionals, so it is important that a broker has developed such relationships beforehand to enable a smooth transaction.
As the profit motive is significantly larger in commercial real estate deals, buyers and sellers will often want financial and tax advice. This is usually done by consulting with their own accountants and financial advisors, which is recommended, however, when appropriate, it can be helpful for the broker to be involved in these transactions so the broker can better advise on the real estate portion of the transaction based on the items the principal financial advisor recommends.
There is no doubt that legal advice will be needed in any commercial real estate transaction and as a broker, unless you hold a license in law, you are not permitted to provide that advice or draft legal drafts and deeds. It is, again, important that the commercial real estate broker has established relations with competent lawyers who can facilitate transactions rather than killing them. Are you looking for such attorneys to work with? Let us know and we would have happy to provide references.
Sellers want appraisers’ valuations in order to establish a selling price. Buyers pay for appraisers as mandated by lenders before they extend the loan in order to purchase the property. Appraisers need to be not only specialized in commercial real estate, but also in the type of commercial real estate as the property under consideration.
Depending on the type of transaction, various other professionals may need to be involved. This will change from time to time and here are a few scenarios elucidating the requirement of additional outsider help:
- Business Brokerage
This brings us to the closure of this part of the article. Do you know any of these professionals who you would like to recommend? Are you looking for any such professional for your transactions in San Diego Commercial Real Estate? Or do you just have some questions? Drop a comment and share; we would love to hear from you.
As mentioned already, commercial real estate transactions are much more complex than residential real estate ones. As a result, brokers often need to be specialized within specific types of properties of commercial real estate. However, if the geography is a small market, it is possible for the broker to service most segments within commercial real estate. But in more larger markets, including San Diego Commercial Real Estate, it is very difficult to know the market for every product type. Make sure the broker you are working with has specific experience in the type of property that you are interested in.
While there are many types of properties with the San Diego Commercial Real Estate Industry, the major ones are ;
Multi-Family 5+ Units (more on this later)
Some of the smaller segments include hospitality, storage, and multifamily, which is last in this list, but the largest within this category of sub-segments. Interesting to note that Gabhart Real Estate Advisors has experience within most of these segments in San Diego!
Now let’s consider each major type of property within the commercial real estate segment:
Each type of user has their own requirements. As a broker, it’s important to understand the factors that tenants would consider important for their business. What is important for a law firm is not likely to be important for an IT startup, and so forth. While there are many sub-categories (converted homes, low-rise, mid-rise, high-rise, specialty etc.) within this category, most of San Diego’s office properties fall under the following:
Footfall, window and internal display & layout are the more important variables in this type of property. In San Diego Office, showrooms often fall within prime localities in order to attract the most customers.
As the name suggests, a space suitable for storage of goods (depending on the type of goods) as well as administrative and sales teams. Location, price, and usability are often the most considered points in such transactions. Certain suburbs of San Diego are well known for office warehouses.
Security, storage capabilities, bonded, climate control is some factors to consider. Most of San Diego’s warehouses are located in suburban areas around the 13 cities.
Here, often legal matters matter the most. Free trade zones, licensing for light and heavy manufacturing are of prime importance. Availability of labor nearby is another key consideration. Free Trade Zones # 153 in the San Diego / Tijuana area is very popular for various manufacturing concerns for precisely these reasons.
Is another type of industrial product
Apart from the factors mentioned in various types of office spaces above, there are various more which apply to some or all such properties. They are:
· Labor pool availability
· Proximity to customers
· Transportation access
· Space configuration
· Ceiling Height
· Floor Load
· Docking area
· Sprinkler systems
· Zoning laws
· Govt. Incentives (local, state & national)
· Buy vs. Lease
Again, this is a wider segment than most may imagine and carries various subcategories of properties within the retail real estate segment. They are:
These are used by destination orientated retailers such as banks, retail chains or even grocery shops.
When retail is being financed, the tenants business strength is reviewed for considering the tenant’s lease as a security for a loan. Financially stronger tenants in San Diego (and other places) are often granted better terms. However, these terms may change during the course of tenancy based on the business outcomes of the tenant.
Big Box properties in San Diego are limited to large national or International companies. These are companies that require 25,000 + sq. ft. of space, sometimes even more than 50,000 sq. ft.
Small Strip Center
There is no death of San Diego’s small strip centers. These are buildings which contain numerous mom and pop shops i.e. retail outlets which are typically owned and operated by the same person.
Neighborhood Shopping Center
Every San Diego neighborhood has one as each such center services within 1-3 mile radius. There is always several anchor tenants, which vary from cleaners, nail shops, grocery stores et al. Recent trends observed by the National Association of Realtors ® notes that drug stores used to be a part of such shopping centers, however increasingly they have become stand-alone shops near the parking lot, and as such, are known as an “outparcel”.
Community Shopping Center
These buildings service a larger community than neighborhood shopping centers. They typically service up to a 10-mile radius and house a major retailer such as Walmart, or Movie Theaters etc. Fashion Valley & Westfield UTC Mall are a few that fit this category.
Regional Shopping Center
As implied, these buildings service a wider region and are often known as malls even though they need not be an enclosed space. Tenants include a variety of regional & national tenants including boutique stores. The size of such stores ranges between 400,000 sq. ft. and 2 million sq ft. Beyond that, and they are known as super regional. However, it is not just the size of the mall that determines if a mall is a super regional shopping center, but also the tenant mix and sales per square foot to ensure that the building is actually popular amongst customers.
These centers vary in size and objective. They can house certain types of décor such as antique or be geared towards a certain segment such as parents by selling just baby related items. Belmont Park is an example of a San Diego specialty center, focusing on wearable and accessories for beachgoers. Surfs up, dude!
This is where monuments are made. Realtors ® focusing on land deals are often (or should be) Accredited Land Consultants, which is a designation imparted by the Realtors Land Institute. This is a highly-specialized niche within commercial real estate as planners, architects, engineers, developers, and brokers are all often involved. Some of the key considerations in San Diego’s Land transactions are:
· Suitable Soil
· Nearby Amenities