Commercial Real Estate Space - Definitions and Uses

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Space. As Captain Kirk proclaimed - “space, the final frontier!” Today, my mission is to explore a different kind of space - that which folks use to make, store and ship things. In the commercial real estate realm, regardless of genre - industrial, office, or retail - space is measured by the square foot. Simply, if the floor-plan of a building is 100 feet long by 100 feet wide, the square footage is the product - 10,000 square feet. This measurement is then used to compute rental amounts, sales prices, and percentages of operating expenses.
 
Rental amounts. In California, our rental or lease rates are quoted in monthly terms - IE: $1.00 per square foot. Places outside California may annualize the rates - $12.00 per square foot. So, using our 10,000 square foot building and the lease rate of $1.00 per square foot - our quoted monthly rental amount is $10,000 per month. Easy.
 
Sales price. A parcel’s sale price takes into account one of a couple of metrics. First, if a lease of $10,000 per month is in place and an owner decides to sell, the annualized rent forms a return to an investor - say 4%. Therefore $10,000 annually is $120,000. $120,000 divided by our return of 4% yields a price of $3,000,000. On a square foot basis - $300 ($3,000,000 / 10,000 square foot building). Should our example be vacant and our potential buyer desiring a company address - the resulting value will be the comparable market per square foot number multiplied by the square footage. Lately, we’ve not seen a great variance between what an investor will pay vs an occupant. The “occupant premium” - whereby someone housing a business would pay more is a galaxy away.
 
Operating expenses. Leases have an additional component worth mentioning - the way in which operating expenses are reimbursed. You see, in addition to rent, other costs abound. Property taxes, building insurance, roof maintenance, parking lot sweeping, elevator repairs, mowing the lawn and trimming the trees are examples. If you’re under a Gross lease - these expenses are baked in to the monthly check you write. With a Net lease - you pay as you go. As you can gather, regardless of the form, the expenses are yours. Square footage applies based upon the percentage of the premises you occupy. Say your 10,000 square foot home is stand alone. Yep, all those operating expenses are yours. Conversely, if the 10,000 square foot space is a suite on the tenth floor of a 100,000 square foot office tower - your portion would be 10%.
 
Uses of space. Generally, occupants - whether they lease or own - put people, machinery, or products in their space. When you visit your CPA this spring to gauge the amount of your refund - you’ll visit an office. Within the confines are people. A trip to your local mechanic’s shop will evidence lifts, tire rotation equipment, and diagnostic machinery behind the front desk. Products abound in a T-mobile store. But wait. Don’t all these different types of commercial space have people, you may wonder? Sure. But the way operations employ folks is the difference - computing your marginal tax rate, changing your oil, or convincing you to upgrade to an iPhone 13.
 
Next week, I’ll delve into the acute shortage of industrial space and some suggestions on creating new space. So, stay tuned. Kirk, out!
 
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. His website is allencbuchanan.blogspot.com.