What is Commercial Real Estate?

by Chicago Agent

By Carrie Kreydick and John-Paul Wolfe

Have you ever wondered what Chicago’s commercial real estate brokers are up to? Or, have you ever thought about what defines commercial real estate and what it takes to get a commercial deal done? We’re here to clear up the mysteries surrounding commercial real estate. This is the first in a series of columns about commercial real estate that we will be contributing to Chicago Agent magazine. We hope to answer your questions and help you understand more about this diverse, intense and interesting segment of the market.

We would define commercial real estate as any property other than a personal residence with the potential to produce income. Vacant parcels, cornfields, large rental high-rises, retail storefronts, malls, warehouse buildings, large industrial parks, second-floor office space and The Sears Tower are all considered commercial properties.

There are four main disciplines in commercial real estate: multi-family, retail, office and industrial. However, there are also commercial brokers who sell restaurants, hotels and businesses and also conduct real estate auctions. Whenever commercial real estate is involved, the client is better served by using an experienced broker. Most commercial practitioners specialize in one arena, but you will find generalists out there as well.

The multi-family sector includes residential and mixed-use properties. Since the residential sales have slowed, more potential buyers are deciding to stay in rental properties. This sector of the market has therefore experienced rising rents and correspondingly higher property values. Most buyers of this type of property look at the current rents, market rents and ways to limit fixed costs and increase monthly revenues. Cap rates and net operating incomes (NOI’s) are key decision-making criteria when looking at multi-family properties. Residential rentals are considered full-gross leases. The tenant usually only pays for utilities, and the landlords pay for real estate taxes, building insurance and common area maintenance.

Retail properties include storefronts, strip malls, shopping centers, airports and anywhere goods and services are sold. Retail properties are leased to tenants of varying use, size, caliber and credit quality. When pricing retail real estate, owners should consider zoning, location, size and layout, visibility, parking and build out, among other things. Tenants look for locations using demographics, traffic counts, price and suitability of their needs. Triple net leases are typically used on retail properties. The tenant is billed for their proportionate share of property taxes, building insurance and common area maintenance.

There are two basic markets that exist when looking for office space: central business district and the rest of the city. Rates are established depending on the market, supply of space and the level of the building (class). All offices are different and considerations are made for parking, available technology, building hours, amenities, price and flexible square footage requirements to account for future growth and location. Most office leases are modified gross. The landlord pays the taxes, insurance and common area charges up to a base year and the tenant pays their pro-rata share of any increases.

Chicago has grown into a world-class city because it is on Lake Michigan and it is centrally located in the U.S., making it the perfect hub for goods distributed across the nation. Where there is industry, there are jobs, and Chicago’s industrial growth continues to spread across the region. Industrial real estate includes manufacturing, warehouse and transportation-oriented properties. These leases are known as industrial gross.

Commercial properties are bought and sold for investment purposes. Owners want their properties to work for them. They may occupy it themselves, redevelop it, and/or lease it to appropriate tenants for profit. The zoning and development possibilities, location, parking options, layout, condition, competition and other factors come into play when pricing commercial properties.

This is a simplistic overview of the commercial real estate industry. Deals of this nature are complicated, time frames are long and there are a lot of moving parts. There is often misrepresentation, and typically leases and contracts fall apart and need to be pieced back together. Referring your business to an experienced commercial broker will not only ensure that your clients are well represented, but will also guarantee you a percentage of the commission when that deal closes.

Carrie Kreydick is the Director of Business Development at New West Commercial and John-Paul Wolfe is the director of commercial brokerage at New West Commercial. Kreydick can be reached at ckreydick@nwrchicago.com and Wolfe can be reached at jpwolfe@nwrchicago.com.

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