Q. Can you tell us about your background and experience in commercial real estate?
A: I spent 30 years in the hospitality industry prior to the recent 20 years as a full-time commercial realtor. I’m a member of the CCIM (Certified Commercial Investment Member) Institute, which only 10% of commercial realtors nationwide can claim. A CCIM has received advanced training and provides sample transactions to the institute based in Chicago, which are graded to ensure a strong knowledge base and the ability to implement the institute’s teaching. In the state of North Dakota, there are only 15 CCIM members, and not all of them are active in the brokerage business.
Q. What current trends are you observing in the commercial real estate market?
A: I’m seeing shorter lease terms and fewer square feet being used per employee. There’s still work left to be done regarding how hybrid work models impact space usage, and this change will take time for space users to understand, and then for the market to adjust to.
Q. What are the key factors business owners should consider when looking for commercial property?
A: Functionality, location, timing, and price
Q. What are some common challenges that your clients face, and how do you recommend they handle them?
A: Clients are busy running their businesses, and when it’s time to find a new lease space or acquire a property, that gets added on to the daily workload. Responsiveness and momentum are important in a commercial real estate transaction, so tasks related to the lease or acquisition need to move up the daily priority list.
Q. What are the advantages and disadvantages of leasing versus buying commercial real estate?
A: For a buyer, the benefits are appreciation, depreciation, and a fixed base occupancy expense for the duration of a mortgage. For leasing, the benefits are nimbleness to change locations, shrink, or expand.
Q. In what situations would you recommend leasing, and in what situations would you recommend buying?
A: Lease if your business model is easily competed with, or if your staff size could increase or decrease rapidly. Buy if your strategy is to acquire and hold, and have your asset appreciate over time. In general, if a business’s net profit percentage is greater than the annual appreciation potential of a property, then lease.
Q. Are there emerging areas or types of properties that you think will be particularly important in the near future?
A: Medical offices, self-storage, and warehousing are all examples of properties that are in demand now and seem destined to be so in the future. I’m also interested in the ghost kitchen concept and am watching closely to see if it has long-term potential.
Q. What predictions do you have for the future of the commercial real estate market?
A: Property users, for both lease space and to acquire property, are important and a key source of a commercial realtor’s business. Often overlooked is that commercial real estate can be a good investment, both for a beginner and for a sophisticated buyer. It is the investor buyer who helps define market values, taking into consideration a tenant’s business model, creditworthiness, the location of the property, the size, and condition of the property, and the rent and return on investment. These sophisticated buyers generate transactions that may be used as comparable sales for user properties. Buyers should educate themselves on market conditions, societal trends, local growth patterns, cap rates, and business models that have some longevity to them. A good commercial realtor can be a valued team member.
Q. What legal or regulatory issues should business owners be aware of?
A: A significant factor is zoning. Understand the property’s underlying zoning and whether that allows your anticipated use of the property. For a tenant that utilizes space for large groups of people, understanding building codes, especially “assembly use,” is important.
Q. How can a business assess whether a property aligns with its operational needs?
A: If the business relies on inbound customer traffic, then being near customers is more important than ease of commute for the owner and employees. For some retail uses, simply being on the right side of the street is important. For instance, if you’re selling take-and-bake pizzas, being on the right-hand side of the street when evening traffic flow is dominant (right turn in, right turn out); for a coffee shop, being on the righthand side of the street when morning traffic flow is dominant (right turn in, right turn out). Every business is different and one way I help clients find the ideal location is to find a similar business that is dominating its market, then do a 1/3/5 mile demographic study of that high-performing location… then look for similar demographics in the market the client is interested in.
Q. What negotiation strategies do you recommend for first-time commercial property buyers?
A: For the property type, the client is interested in, we can use the client’s budget and the geographic preference to dig and find similar recent transactions that help us understand market conditions and whether buyers or sellers have leverage on the other. Another important thing is not to fall in love with brick and mortar—be willing to walk if the deal isn’t right. There’s always a new day and a new deal. Be prepared. Line up a team that includes a commercial realtor, insurance agent, lender, attorney, and contractor. Be ready to move quickly and aggressively. Have your ducks in a row in advance.
Q. How can business owners ensure they get the best terms in lease or purchase agreements
A: Business owners are skilled in what they do day to day. A commercial realtor is skilled in understanding what deals are getting done and what terms those deals include.
A business owner who negotiates a lease every five years or so is at a serious disadvantage compared to the landlord, as the landlord is likely a professional and does this type of work daily. Find a skilled commercial realtor to represent you (the tenant) to better understand the market conditions that may give you leverage in a negotiation. Having an attorney review the lease and make certain that the tenant understands obligations is also mandatory.
Q. What are some common cost pitfalls in commercial real estate transactions and how can they be avoided?
A: For first-generation lease space, delivered from landlord to tenant in some condition less than finished, negotiating a tenant improvement allowance and understanding the costs to finish the space is essential. For example, if a landlord offers a $25 per square foot tenant improvement allowance, but the actual expense to finish the space is $50 per square foot, then there is a gap that needs to be closed, either by the landlord paying more, the gap amount being amortized over the lease term, the tenant paying more, or some combination of the three. Commercial leasing is the most complicated assignment for a commercial realtor and even more so for an unrepresented tenant.
Q. Are there lesser-known expenses that business owners frequently overlook when budgeting for real estate?
A: Budgeting for a lease space when the occupancy expense is comprised of a base rent and a CAM (Common Area Maintenance), know that the CAM can increase yearly based on true operating expenses. A CAM is generally estimated at the beginning of the year, collected monthly, and then reconciled at the end of the year. If the estimate at the beginning of the year was low (which allowed a property to be inappropriately marketed with an artificially low CAM rate) then the tenant is getting an invoice at the end of the year to make up the difference. Landlords can control some CAM costs, but not all; if it’s a snowy Winter, CAM may increase due to extra snow removal, and the opposite could also be true. At the beginning of the lease negotiation, certain aspects of the CAM can be negotiated.
Jay Nelson, CCIM
Mobile: 701-730-0290
AY NELSON, CCIM
Office: 701-730-0290
jaynelsonarchercommercial.com