As a commercial property owner, you may be wondering how to determine how much to charge for rent. There are a number of factors to consider when setting rent prices, such as the location of the property, the size of the property, and the amenities the property offers.
Deciding on your leasing rates for a commercial property is important — arguably more so than setting rates for multifamily assets. With office, retail, and industrial properties, lease contracts span multiple years — meaning if you underprice your space, you may have to live with the effects for years.
Commercial Property management provides the guiding hand and overall supervision of the day to day operations of a property and can exist with regard to a variety of responsibility, obligation and occupation within the realm of the commercial real estate market. Professional management is a key to real estate profits over the long term. At IPA Commercial Real Estate, we offer the full range of management services, from rent collection and contract negotiation and renewal, through ongoing upkeep and preventive maintenance. With extensive experience and a portfolio of thousands of tenants, IPA has the strength to provide an immediate solution to any management problem.
Commercial and retail leases use various rental pricing methods. The nature of a tenant’s business often determines which commercial lease calculation is best to use.
What is Commercial Real Estate (CRE)?
While it might not be immediately obvious, commercial real estate is a constant part of our daily lives. Simply put, commercial real estate (CRE) is defined as any property that produces income for its owner(s). From the office you commute to every weekday to the store where you buy household goods to the gas station down the road, every property that has the potential to bring income is considered a commercial property.
Commercial properties are generally classified into four main categories: Office, retail, industrial and multifamily. Many larger commercial properties are mixed-use, which means they feature two or more types of commercial real estate within the same lot or building. While investors may buy or sell commercial real estate, it is more often leased to individual business owners. Stores and restaurants might lease space in shopping centers and businesses might lease office space or warehouse spaces.
Types of Leases
Different types of commercial leases imply different financial responsibilities for the landlord and the tenant, which can have a big impact on what you can charge.
NNN (Triple Net) Lease
The three ‘nets’ of a triple net lease are: property taxes, property insurance, and common area expenses (sometimes called CAM or common area maintenance). With a NNN lease you will pay a base rent plus all of the triple net extras. So, if you have a 1,000 square-foot space that rents for $8 per square foot per year and the NNN fee is $4 per square foot per year, your commercial rent with a NNN lease would be:
- 1,000 sq. ft. x ($8/sq. ft. per year + $4 NNN/sq. ft. per year) = $12,000 per year or $1,000 per month
Modified Gross
Modified gross leases don’t include all the NNN fees. The only additional charge you pay for with a MG lease is utilities. For example, if you’re renting a 1,000 sq. ft. space and the modified gross rent is $10.00 per square foot per year, your rent would be:
- 1,000 sq. ft. x $10/sq. ft. per year = $10,000 per year or $833.33 per month + utilities
Full Service Gross
Full service gross leases are basically the rent paid for occupying the space. The landlord covers all property operating expenses, including taxes, insurance and utilities. If the size of the space you’re renting is 1,000 square feet and the rent is $12 per square foot per year, then your commercial rent is:
- 1,000 sq. ft. x $12/sq. ft. per year = $12,000 per year or $1,000 per month
4 Factors to Use in Setting Rental Rates
1. Location and Market Analysis
One of the most critical factors in setting rental rates is the location of the property since this plays a significant role in determining its market value. You or your property manager will need to analyze the location’s demographics, population growth, and economic trends to assist in determining your rental rates.
Look at comparable properties in the area to determine their rental rates. This is where market analysis comes into play. Analyzing the rental rates of comparable properties can help you determine the market demand, which in turn can help you set the right rental rate for your property.
2. Property Size and Configuration
The total square footage of any commercial real estate property is the usable square footage of space that a tenant can occupy. In some cases, the size of space compared to the overall space in a building will further expand the definition of usable space.
When a landlord leases commercial space, there are advantages to dividing the space to allow for multiple tenants. This division will determine the usable space calculations and areas each tenant can occupy.
In a partial floor commercial lease, the usable space includes all office space, storage areas, self-contained restrooms, entryways, and internal fixtures.
A full-floor commercial lease includes all usable square feet enclosed by the boundaries of the floor. This lease contains space that is not always usable for conducting business.
3. Operating Expenses and Capital Improvements
It ou or your property manager will needs essential to consider the operating expenses and capital improvements when setting the rental rate. Commercial real estate operating expenses include the costs for maintaining and operating a commercial property. These include rentals for office space, warehouse or industrial space, retail, and restaurant buildings. Capital improvements include any significant upgrades or renovations made to the property, such as a new roof, HVAC system, or flooring.
To determine the right rental rate, you should consider the operating expenses and capital improvements and add them to the property’s mortgage payment to determine the total cost of ownership. You can then use this figure to set the rental rate that will cover these costs while generating a profit.
4. Tenant Demands
Tenant demands include the type of tenant that the property attracts and what the tenant is looking for in a property. For example, an office tenant may need a particular layout or access to specific amenities, while retail tenants may require high traffic areas and large parking lots.
To determine the right rental rate, you should consider the tenant demands and ensure that your property meets their needs. This can help you set the right rental rate that will attract the right tenants and generate a steady income.
What Is Professional Property Management?
Property management means that you hire someone else to run a property you own for you, handling the day-to-day tasks that keep your investment prospering. A commercial property manager handles non-residential properties like offices, retail spaces, storage facilities, shopping centers and industrial buildings. Like residential property management, commercial management encompasses the tasks and responsibilities of operating an income-producing property.
Many property owners choose to engage a commercial property management firm to ensure all the day-to-day details of operating a commercial property are handled competently. The management firm is usually granted authority to make decisions that impact the amount of income the owner derives from the property. In many cases, the right management can result in a lower turnover of tenants as well as securing the best possible rental rates for the space.
Commercial property management involves being able to prioritize and execute a wide array of tasks such as the advertising, marketing and leasing processes. Property managers of commercial spaces must keep meticulous administrative and financial records, and keep all applicable maintenance, taxes, mortgages and insurance updated. They ensure rent is collected, and respond to tenant needs and issues.
Basic Responsibilities Involved in Managing a Rental Property
- Advertising your property
- Preparing and enforcing the lease
- Tenant screening
- Evicting (when necessary), and finding new tenants when vacancies occur
- Doing basic and preventative maintenance, making repairs as needed
- Handling complaints, as well as moderating issues between tenants
- Financial Management (establishing the right rent, collecting rent, calculating costs and taxes, pay invoices, etc)
- Overall Supervision
- Staying up-to-date with Landlord-Tenant laws and regulations
Why Choose IPA Commercial Real Estate?
Choosing the right commercial property management company can make real estate ownership a breeze. For people who own commercial and industrial properties, working with a respected property management company can be a great resource. With 30+ years of experience in the Inland Empire, the experience of the IPA Commercial Real Estate team provides a depth of knowledge regarding maintenance and project costs.
Just like management in any other business, a respected management company can monitor the care and financial requirements of any property. We can also help evaluate your rent structure. IPA Commercial Real Estate very focused on client properties and tenants and we have the skills and knowledge to make your ownership experience easy and pain-free.
We offer 24/7 Service from our team day or night! Call IPA COMMERCIAL REAL ESTATE at (951) 686-1462 to discuss how we can help you. Let us show you how to add value to your property.