The world of commercial real estate has multiple facets of information. Investors, buyers, sellers, and anyone in between juggling plenty of important terminology, from the types of properties to how they are purchased. It is easy not to know where to start.
This beginner’s guide to commercial real estate terms gives you a kickstart towards your goals. By breaking down the content into understandable sections and ideas, you can focus on what applies most to you—looking to take this new knowledge even further? Sands Investment Group is here to get you started.
Understanding Commercial Real Estate Terms
Categories of Commercial Real Estate
Multifamily is often considered the crossover between residential and commercial real estate. This means that someone can use the property residentially, but the property’s primary purpose is an investment opportunity. This is something such as a duplex or multi-unit apartment building. You can find out more by looking into the multifamily listings we have to offer.
Office spaces are typically broken up into urban or suburban. Urban office buildings are found in cities, often a part of skyscrapers and high-rise buildings. Suburban offices generally are smaller in size and often grouped in office parks. There are so many office listings to choose from, especially from the current collection of office listings we have at Sands Investment Group.
Retail spaces typically house retailers and restaurants. They can be single-use buildings that stand alone or multi-tenant. Often these are described as shopping centers as well. Shopping centers vary by size, concept, type, number of tenants, and trade area. If you are looking into investing in a retail space, there are many to choose from in our collection of retail listings.
There are four main types of industrial-centered commercial real estate: heavy manufacturing, light assembly, flex warehouse, and bulk warehouse. They often vary heavily in size, depending on the specific use-cases. With many options to choose from, it is important to find the best fit for you. Sands Investment Group can help you make that call with our current collection of industrial listings.
Hospitality can also be referred to as hotels. These properties are described as full service, limited service, or extended stay locations.
Commercial Real Estate Investing
Land banking refers to acquiring land, leaving their cash in a tangible, fixed asset rather than a savings account or the stock market. There are no extra payments of utilities, tenant issues, mortgage payments, or anything else that could impact a property.
Fix and Flip
With fix and flip, an investor purchases a property, renovates it, and then sells it for a profit. This is typically done at a discount because of its condition.
Wholesaling is considered a strategy that includes a wholesaler entering in on a contract for a property before then selling it to a new buyer on behalf of the owner. This type of contract means that the wholesaler did not purchase the property, but they have the right to sell it for the owner.
BRRRR stands for “Buy, Rehab, Rent, Refinance, and Repeat.” This is a standard method of investment that contains more steps but brings forth a profitable result.
Using passive investing, you can minimize buying and selling and maximize returns. This tracks a market-weighted index or portfolio. While it is most common in the equity market, it is more used in other investment spaces, such as commercial real estate.
Commercial zoning laws create regulations for different buildings. This often controls the type of activities a business can participate in, depending on the area. It also notifies what categories of business can occupy a zoned area. This can also factor into the features of the building as well in ways such as its setback.
There are three metropolitan base definitions for building classes.
Class A is deemed the most prestigious of buildings that have rents that are higher when compared to places in the proximity. They are considered state-of-the-art, accessible, and have a strong presence in the market.
Class B is where most of the users can encounter average rent for the area. The finishes are not typically as well-done as Class A, but they are considered suitable for the site. These do not compete well when priced similarly to a Class A option.
Class C classifications are properties with function space to rent below the area’s average cost.
Request For Proposal
As you determine what you need and want in a space, sharing that with a commercial real estate broker is an essential first step. You can submit these specifications in the “request for proposal” document as you find properties that meet your criteria. This document gives landlords information about what you are looking for to begin negotiations.
Right of First Refusal
This clause is advantageous for commercial buildings that receive a lot of attention. It requires a landlord to offer you additional space to lease before making it available to the general public. While you are offered this space first, you can refuse without implication.
Rentable Square Footage
Rentable square footage is the amount of usable square feet in a space, including a portion of the shared space. That common space is defined as the space that every tenant has access to and can use.
Usable Square Footage
Compared to rentable square footage, the usable square footage is the total area unique to the tenant. This does not include the shared common space that all tenants can use.
The parking ratio is the number of parking spaces in the property’s lot reserved for a company’s employees. This can be found by dividing your space’s total rentable square footage by the number of parking spaces.
Option To Purchase
This part of a lease is the place of providing information to a company about how they can potentially purchase a space they are leasing. This is most commonly seen in whole-building leases with a single-tenant being responsible for the property.
While not every landlord chooses to incorporate this clause, tenants need to reference it to see whether or not they can sublease the space to another business or individual. The tenant can consider renting out the space to someone else for some or all of the remainder of the lease when it is allowed.
Capitalization rates are estimates used to compare the rates of return on commercial real estate properties. This number is found by dividing the property’s net operating income from its property asset value.
Cost approach is one of the methods used in real estate valuation. It estimates the price that a buyer should pay for a property as equal to the cost to build an equivalent building.
The market approach determines the value of an asset by observing the value of other similar assets. This comparison can help decide what to price the asset at that fits fairly into the rest of the market.
Income Capitalization Approach
The income capitalization approach is a type of real estate appraisal that allows investors to use the property’s generated income to estimate its value.
Gross Rent Multiplier (GRM)
The gross rent multiplier (GRM) takes the property’s purchase price divided by the annual gross rents. This equation takes the numbers into account before considering property taxes, insurance, and utilities.
Learn More With Sands Investment Group
This beginner’s guide is just the start to learning the ropes of commercial real estate. Putting these terms into action can provide investment opportunities and a growing financial plan. Do you want to know more about the commercial real estate industry? Sands Investment Group is here to provide you with the resources and the knowledge you need. Talk to one of our advisors today to get started on your investment journey.