CCIM Intro Course, Study Guide: Module 1
INTRODUCTION TO COMMERCIAL INVESTMENT REAL ESTATE ANALYSIS
Study Guide for Module 1: Commercial Real Estate
Learning Objectives .................................................................................................................. 1 Commercial Property Types ....................................................................................................... 2 Types of Office Properties ......................................................................................................... 2 Classification of Office Properties ............................................................................................... 2 Industrial Properties .................................................................................................................. 2 Retail Properties....................................................................................................................... 4 Overview of User and Investor Activities ...................................................................................... 5 Types of Real Estate Markets: Space Market ................................................................................ 6 Scope of Services: Tenant Representation .................................................................................... 6 Scope of Services: Brokerage .................................................................................................... 7 Scope of Services: Follow-Up Services........................................................................................ 8
Learning Objectives List the characteristics of each commercial real estate type: office, industrial, retail, and multifamily Identify data and resources that would enhance decision-making for each property type Distinguish between the concerns of user clients and investor clients List services that can be offered to the commercial real estate client
Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
Commercial Property Types The four primary types of commercial properties are: Office Industrial Retail Multifamily
Types of Office Properties Low-rise: Fewer than seven stories above ground level Mid-rise: Between seven and 25 stories above ground level High-rise: More than 25 stories above ground level Classification of Office Properties Office properties may be classified as Class A Class B Class C
Class A properties are the most functionally modern. Properties classed B and C in the same market typically command lower rents because they are older and have experienced some degree of obsolescence. They may not be as efficient or desirable as class A properties because their design or condition causes functional or layout problems. Industrial Properties Industrial properties house production, manufacturing, high-tech, distribution, or warehousing operations. These properties also may include some office space or storage space. Like office buildings, some industrial buildings are located in parks and can be classified as single-tenant or multi-tenant buildings. By broad physical and functional characteristics, industrial space falls into the following categories. Bulk These properties represent the simplest of all industrial space because they may consist of little more than four walls, a roof, and a floor. Bulk properties can be very large, averaging 50,000 square feet (sf). Sometimes bulk properties are measured in cubic feet because height can be critical to some industrial tenants. Typically, bulk properties have little office space. They may have elaborate flooring and paving around the building. Aprons leading up to the warehouse are made of concrete to withstand the weight of rail and truck traffic. Loading docks may be at truck level (dock high) or have load levelers to adjust to truck bed heights. Office/Warehouse Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
This category of industrial space may devote 5 to 25 percent of its space to office requirements and typically is constructed of metal, brick, block, or wood. This category typically features dock-high loading and is located near or within city limits. Good highway access is an important consideration for office/warehouse properties. Office/Service These properties tend to be more expensive buildings located in attractive, park-like settings with landscaping. They are usually at the highest end of market rents and devote more than 25 percent of their space to offices. Office/service properties are similar to research and development facilities. They typically are located along major arteries. Research and Development This category is a hybrid of office and manufacturing. The research and development category is the most people-intensive of industrial properties. Tenants of these properties usually require many improvements, such as clean rooms for chip manufacturing, laboratories, cafeterias, lounges, and other amenities. Research and development properties have rental and sale values second only to pure office space among commercial properties. They often are located near universities and a white-collar labor base. Freestanding This category often is developed in an industrial park setting or done as a build-to-suit on a selected piece of property. Freestanding properties usually are designed for manufacturing, distribution, assembly, packaging, and similar uses. These properties vary in their construction type, design, ceiling height, utility services, amount of land, and usually are designed, built and occupied by an owner/user for a special purpose. Multi-tenant This type of industrial property attracts the smallest user of industrial space (1,000 to 5,000 sf). It is often situated in a complex of similar buildings, where necessary support services are located in or near the complex. Multitenant properties might contain incubator space for start-up high tech, warehousing, or distribution tenants renting on a short-term basis. Buildings for such tenants usually require 18-foot or higher ceilings, efficient truckloading arrangements, and space for offices. Large Manufacturing These facilities are used for manufacturing, production, assembly, shipping and receiving, or major production processes. Size is based on the users requirements. These properties often are radically modified to suit a particular product or process, and therefore are prone to functional obsolescence. Industrial Parks Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
This is a planned development often controlled and administered by one person or an investment entity such as a real estate investment trust (REIT). The types and character of uses are controlled to protect and preserve compatibility. Industrial parks can serve mixed-use, single-use, special scientific and technological uses, or sophisticated communications uses. Retail Properties Retail properties are used exclusively to market and sell goods and services to a vast variety of consumers. The configuration of these properties is designed to meet a particular consumers buying preferences. Retail properties fall into general categories such as commercial strip properties, neighborhood shopping centers and community centers. Commercial Strip Properties These are strips of commercially zoned land divided into parcels to be developed for retail use. They usually have a fairly narrow trade area and offer a variety of services. Neighborhood Center This center is designed to provide convenience shopping for the day-to-day needs of consumers in the immediate neighborhood. A supermarket anchors half of these centers, while about a third have a drugstore anchor. A neighborhood center usually is configured as an L or straight-line strip with no enclosed walkway or mall area, although a canopy may cover and connect the storefronts. Community Center A community center typically offers a wider range of apparel and other soft goods than a neighborhood center. Among the more common anchors are supermarkets, super drugstores, and discount department stores. Community center tenants sell items such as apparel, home-improvement goods, furniture, toys, electronics, or sporting goods. Freestanding Store This is a commercial establishment providing goods and services in single- or multiple-use buildings of various sizes. The larger, newer freestanding stores also are referred to as big boxes. Freestanding retail development often is created on an infill basis to fill specific market gaps or local needs and may be found near major shopping centers and along major corridors. Regional Center This center type provides general merchandise, a large percentage of which is apparel, and services in full depth and variety. Its main attractions are its anchors: traditional, mass market, discount department stores, or fashion Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
specialty stores. A typical regional center usually is enclosed with an inward orientation of the stores connected by a common walkway with parking at the perimeter. Super-regional Center Similar to a regional center, but larger in size, a super-regional center has more anchors, a deeper selection of merchandise, and draws from a larger population base. As with regional centers, the typical configuration is as an enclosed mall, frequently with multiple levels. Power Center This type of center is dominated by large retailers, including discount department stores, off-price stores, and warehouse clubs, or category killers. Fashion/Specialty Center This type of center is composed mainly of upscale apparel shops, boutiques, and craft shops carrying selected fashion or unique merchandise of high quality and price. These centers need not be anchored, although sometimes restaurants or entertainment can provide an alternative to high-profile anchors. The physical design of the center is sophisticated, emphasizing a rich dcor and high-quality landscaping. These centers usually are found in trade areas with high income levels. Theme/Festival Center These centers typically employ a unifying theme that is carried out by the individual shops in their architectural design and, to an extent, in their merchandise. Tourists are the biggest market for these centers: restaurants and entertainment facilities can anchor them. These centers, generally located in urban areas, tend to be adapted from older, sometimes historic, buildings and can be part of mixed-use projects. Outlet Center Usually located in rural or occasionally in tourist locations, outlet centers consist mostly of manufacturers outlet stores selling their brands at a discount. These centers typically are not anchored. Overview of User and Investor Activities There are many ways that commercial real estate can be profitable for commercial investment practitioners. A variety of tasks and services can be offered to both user and investor clients. Users One of the first steps to understanding the user side of the business is to learn as much as possible about a specific product and the types of clients
Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
who use it. This is a never-ending process, as technology, construction techniques, and client applications always are changing. Investors The individuals or companies acquiring property as a commodity to be converted into wealth are investors. Generally, investment properties currently are occupied by tenants and have the potential for producing a positive income stream. It is not enough to have a thorough understanding of the fundamentals and characteristics of real estate investmentsan understanding of the motivations and risk tolerance of investors also is needed. Users and investors do not function in a vacuum. Types of Real Estate Markets: Space Market Space Market The space market represents the physical space that exists within the marketplace. The availability of space is determined primarily by supply and demand. Fluctuations in population growth, transportation, land-use controls, employment, location, use, and numerous other factors influence what is available and where. Therefore, these changes will impact supply and demand. For example, as demand increases and supply or availability decreases, rental rates and property values increase. Because of the constant change in supply and demand factors, an element of risk is associated with the space market. If these fluctuations could be predicted with certainty, property cash-flow streams and rental rates would be stable and risk free. Instead, investors and users must attempt to predict the future by evaluating all the factors influencing the space market to try to forecast availability, absorption, and future demand. Therefore, it is important to have an in-depth understanding of market activities, trends, events, rates and prices, and transactions. Scope of Services: Tenant Representation Tenant representation focuses on the relocation process and the real estate professionals role when representing the user. The tenant representative, as leasing specialist, represents the user looking for space, not the developer or landlord. The tenant representation process includes the following tasks. Step Step Step Step Step Step 1: 2: 3: 4: 5: 6: Needs Analysis Market Research Building Investigations Requests for Proposals Economic/Functional Analysis Negotiations
Step 1: Needs Analysis Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
The initial step is to work closely with the tenant to define current and future space needs accuratelyamount of space, kind of space, location, necessary amenities, location with respect to competitors, trade area characteristics, move date, and special needs. This involves studying the tenants current space, probing goals and motivations for taking new space, and other factors. The results of the analysis should be summarized in a letter of understanding to the tenant for approval before proceeding to the next step. Also at this stage, a project schedule is drawn up for the tenant, showing the time allotted and the responsibilities assigned for each step. Step 2: Market Research The market is examined for available space that fits the users needs. Possibilities are narrowed to a manageable number. The result of this stage is a list of locations for the tenant to consider. Building data specific to each property is presented to the tenant. Step 3: Building Investigations The result of this stage is a short list of the best spaces or sites for the tenant. These spaces are screened and tours of the sites are arranged for the tenant. The tenant compares the features of each with its needs. Step 4: Requests for Proposals In this step, letters are sent to the owners or owner representatives of the top candidates specifying the tenants final requirements. The result is a proposal to lease from the interested owners, spelling out the terms for which they would consider in leasing to the tenant based on the tenants requirements. This is the beginning of the negotiating process. Step 5: Economic/Functional Analysis Landlords proposals to lease are analyzed for a variety of economic factors, such as rental rate, tenant improvements, moving allowances, parking, and other concessions. Functional characteristics, such as floor location and size, expansion options, and building amenities, are compared. Step 6: Negotiations When the deal is made, the tenant representative coordinates getting the agreements into legal terms and helps expedite the process of preparing and getting the lease signed. Summary of Tenant Representation A benefit of representing tenants in commercial real estate is that there is assurance that the client has a specific need to be fulfilled within a certain timeframe. Scope of Services: Brokerage
Copyright 2002 CCIM Institute. All rights reserved.
CCIM Intro Course, Study Guide: Module 1
Land Acquisition Market rental rates as well as construction and financing costs must be obtained prior to property acquisition to determine if the return on investment is worthwhile. Information about comparable land sales, other available parcels of land, and competing projects, either built or to be built, is key to the analysis. A knowledgeable real estate professional also is able to advise the client about tenant preferences specific to that particular market. Leasing A leasing specialist representing a property is responsible for bringing tenants to that property. A leasing specialist will confirm that the lease rates are compatible with the market, target the markets most likely to be suitable for the property, and design and implement a marketing plan. Once the plan has been implemented, the leasing agent is responsible for providing feedback to the owner and for the follow-through necessary to close the transaction. Whether the leasing specialist represents the building or the tenant, the leasing specialists function is to find a fit between vacant space seeking a user and a user seeking a location. Selling Opportunities exist to sell properties of all kinds. The same three basic marketing steps apply that apply to leasing: establishing a value range, targeting the market, and developing and executing a marketing plan. The real estate professional will need in-depth knowledge of the market, market trends, and local traditions. Scope of Services: Follow-Up Services It is important for the real estate professional to remain active after the deal closes. Successful business relationships do not just happen at the eleventh hour. These relationships require planning, effort, and continual contact with key decisionmakers, investors, and users, as well as contact with ancillary professionals such as lenders, accountants, title companies, lawyers, appraisers, contractors, and engineers. The broader the network, the easier it is to facilitate a successful transaction. Transactions are influenced, modified, and frequently destroyed by circumstances and surprises that are not easily foreseeable. By establishing and maintaining a broad network, the real estate professional is able to engage the services and assistance of the appropriate problem-solver. For most commercial real estate professionals, this ongoing process focuses on both the people and properties in the market. The effective real estate professional realizes that developing client relationships and seeking repeat business means long-term success in the commercial real estate business. The concept of adding value means providing service before, during, and after the transaction.
Copyright 2002 CCIM Institute. All rights reserved.
