Residential real estate connects consumers to homes; commercial real estate connects investors to profit. Money is exchanged when assets are purchased, maximized as assets are managed, and earned when assets are sold, as noted by Stuart Rider, commercial real estate developer, contractor, lecturer and author. Commercial real estate (CRE) is assessed from two key perspectives: cash flow and building value.
Examine the condition and environment of the property. Inspect the structure internally and externally giving particular attention to the roof, utility systems, ceiling heights, age, lobby and lawn care. Imagine the potential repairs that will be needed in a three to five year period, the initial impression clients would have upon entry, and the competitive environment of the neighboring market. If a nearby anchor store is opening (or closing) this can greatly influence the success or failure of this venture.
Anticipate what can be achieved in this location. CRE assets recognize value when occupied by a tenant. Analyze the potential entrepreneurial candidates for this structure and location. Be mindful that buildings are categorized by class types which denote characteristics about the building and its environment. Class A buildings are highly desired new or recently renovated structures often appealing to high profile tenants such as doctors and lawyers, whereas class C buildings provide functional space for tenants seeking economical rent rates. These include businesses that frequent “walk-in traffic” or “cash-and-carry” business transactions.
Assess the property value. CRE value is determined by dividing the rental income (collected rent from tenant) by the capitalization rate (average return on investment of similar buildings in the area). Dolf de Roos, chairman of Property Venture, notes that capitalization rates on Wall Street are typically around 5 percent. Thus, a rental income of $100,000 would render a prospective value of $2 million ($100,000 divided by 5 percent).
Enhance the features and amenities of the building to generate greater income. Potential tenants are enticed by options that help them operate more efficiently. An offer to install a security system, parking garage, high speed internet access or signage can influence desirability, increasing rental income and overall building value.