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What are some of the unique characteristics of commercial property?

Commercial property is developed so that businesses can be operated from the resulting space.

investor looking at commercial properties

Commercial property is developed so that businesses can be operated from the resulting space.

So, it has some unique characteristics which you may not necessarily find with residential property used for dwelling or self-occupation. However, some features of commercial property may also apply to multi-family homes and transient accommodation such as hotels. Examples of the unique characteristics include:

Location:

For most commercial properties, location is the key to success—hence the adage “location, location, location.” Traditionally, grade A office blocks would have always been in prime city areas and close to other buildings. They would be next to or on top of a subway station and supporting amenities such as restaurants, coffee shops and shopping areas for office workers. Usually found near other complementary businesses so that economies of scale and related synergies could be enjoyed.

While advances in technology have changed the absolute necessity to be in city centers and near related businesses, there is still strong demand from companies such as lawyers, accountants, and financial institutions to group their primary offices together. Of course, if such businesses continue to want to be close together, there is an ongoing necessity for other service providers such as restaurants and bars to occupy commercial space in nearby areas.

Shopping centers are another example where their location must be exactly right to attract shoppers. Studies have found that the catchment areas of most shopping centers are within a 20-25-minute drive from most of the population the center aims to serve. Regional centers may attract visitors from up to one hour’s travel away.

The “perfect” location for a shopping center is often referred to as a “hard corner.” That is a site with dual road frontage too so that the property and car parking areas can be accessed and/or exited from two sides. Most importantly a hard corner supports dual visibility, meaning that the shopping center can be seen from at least two directions by passing traffic.

If a hard corner cannot be secured then a site with wide frontage is often workable, with secondary access to a side service road.

Other commercial property has its own set of locational needs, most of which revolve around the need to be close to its clients or customers if they have a need to visit the occupiers of the space.

Scale:

given that most commercial properties such as grade A office blocks or large-scale shopping centers are catering to large numbers of people, as you’d expect, the scale of the buildings may total ‘000 of square meters. Some office blocks are 100+ stories high and some mega shopping centers have over 200,000 sq. meters of space.

In addition to the usable or rentable space, there must be support space for loading and unloading, storage, car parking, not forgetting machinery or plant and equipment.

Of course, not all commercial properties are large scale and there are small shops or offices, as small as any residential home or apartment but CRE is usually thought of as larger in scale compared to most residential properties.

Design differences:

Design differences are partly due to the differences in functions of commercial buildings compared to residential property. CRE must be designed to receive larger numbers of employees and visitors, but also be able to let them leave quickly in an emergency.

Commercial property has far more support areas which have to be carefully designed so that the operation of the property is efficient and effective.

Design issues may also be for aesthetic reasons. It is not unusual for some owners of prime commercial sites to develop a so-called flagship building with striking architectural design, both for prestige and memorability.

Building systems:

Building systems are, obviously, going to be more complicated and of greater ability in terms of output in commercial properties. The heating ventilation and air-conditioning systems (“HVAC”) need to be of a sufficient capacity to both cool and heat large spaces occupied by multitudes of people. These systems need to be easily adjustable in case temperatures are high or lower than normal. Or in the cases of, say, shopping centers, if the center is busier or quieter than normal for systems to be able to increase cooling or conserve energy is also important.

Larger commercial properties will also have planned preventative maintenance (“PPM”) programs in place. They cannot risk building systems breaking down and inconveniencing tenants or their guests, thereby preventing or affecting business operations. So, on a monthly, or annual basis in the case of large equipment such as chillers or transformers, maintenance and repairs will be carried out even if there are no signs of a problem. AI can further help the detection of any potential issues as suitably placed sensors will watch and record the running of machinery and equipment.

Usage and usage patterns:

Usage and usage patterns clearly differ. With residential properties (even multi-family homes), there are likely to be fewer than, say, five occupants including adults and possibly some children per unit. They will have to use the property for residential use only, abide by the rules and regulation and, for example, not cause a nuisance or disturb neighbors. These properties can be used 24 hours a day with occupants able to come and go as they please.

Offices, on the other hand, may have limited opening hours but, obviously much heavier usage. Typically, as people start arriving for work from 8am onwards, the lobbies, elevators and the office building itself is subject to heavy usage. Then, again as working hours finish around 6pm there will be an exodus as staff leave and head home. Of course, there will always be those who work late but, as a percentage of total building occupancy, this will be relatively low.

However, some buildings occupied by financial related companies have dealing or trading floors where 24-hour occupancy and use is needed—although this will be in shifts and not by the same people for the duration.

The usage and volume of visitors of shopping centers put heavy demand on commercial property. Patronage by visitors and delivery people can be predicted with the weekend and early evenings likely to see the busiest times. It is then up to the building staff to adjust both themselves and the operation of the property to cater for such changes in usage.

Good accessibility:

Good accessibility is vital for most commercial property. Accessibility is related to location but more specific to the buildings. With CRE, buildings need to be easy to get in and out of a car park and the property should be easy for clients or customers to find. The elevator or escalator systems must be adequate to enable people to get to and from their office or to different floors in a shopping center, and so on.

Ability to generate income:

As commercial properties are acquired by investors in lieu of their ability to generate income, the owning entities will run them like any other business. The goals will be to maximize revenues and minimize operating expenses so that gross profit margins are perfected.

Residential property, on the other hand, is usually occupied as a place for living and sleeping or raising a family and profitability does not come into account. Yes, there will be operating expenses for repairs and consumption of utilities and governmental taxes, but these are costs to be borne by the householder.

Commercial properties which are run as a business will need to keep a constant watch on items such as:

  • market rentals within the subject property and in its competitors;
  • changes in supply and demand of equivalent properties in the overall market and the same market sectors;
  • material changes in the market in terms of what is being supplied for tenants such as new internet connections or better lighting or even supporting amenities within a building;
  • current and forecast occupancy rate;
  • forecast primary and ancillary revenues produced by the commercial property on an annual basis, plus a 2-, 3- and 5- year forecast;
  • typical monthly expenses for operating, repairing, and supporting the property including insurance and cost of staff;
  • provisions for “out of the ordinary” or capital expenditure (“CAPEX”) on major replacement or upgrading items;
  • anticipated gross operating profit

There are many other key differences between residential and commercial properties and some of these will be covered in later articles.

One critical point to remember though is that commercial properties need to appeal to a wide variety of investors. Ranging from the individual, smaller investors who might look at single retail units or mixed use to the institutional grade type investors who will have the money to buy a prime grade A office building or a mega sized shopping center for their pension fund. The scale and quality of the building in question will matter as will the management.

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