Property Management for Commercial Properties
In the past, commercial properties have been seen as the province of big investors. It's true that investing commercially requires a greater initial outlay, but this doesn't exclude newcomers. For people with money to invest, commercial properties have a lot to offer. The profit potential is higher than with residential properties, and there is greater equity potential to provide capital to invest further.
Key Point Module
- 1 Commercial real estate refers to any property that’s intended to turn a profit. This can be through rental income or capital gains.
- 2 Commercial properties have a greater income potential than residential investments. The average return on commercial properties is 6 to 12% annually, compared to an average of 1 to 4% for single family homes.
- 3 There are fewer laws governing commercial leases than residential leases. As a result, contracts tend to be more complicated and take longer to negotiate.
- 4 There are greater risks in commercial property investments as the industry tends to be more sensitive to prevailing economic conditions. There are also more public risks: If a customer slips in a poorly maintained parking lot, the owner may be liable.
Currently in the commercial sector, vacancies in both retail and industrial properties are declining and despite the growing popularity of online stores, retail rents in many cities remain high. This probability of a stable income can make it easier to get financing from banks.
Commercial investing does have its challenges, the greatest of which is probably the learning curve. Running a commercial property successfully requires substantial knowledge about contracts, negotiating and local ordinances. For many commercial property investors, a property manager is an essential part of their team, helping them minimize expenses, maximize profits and keep the value of their property growing. This guide discusses the essentials of investing in commercial property, what a commercial property manager can do for you and how to find the right one.
What to Know About Investing in Commercial Property
Commercial property refers to any non-residential property that’s intended to turn a profit. It normally falls under four categories: retail, industrial, office and special spaces. Special spaces refer to property that’s been developed for a specialized use, such as an airport, school or amusement park. Some people include multifamily apartment blocks under the commercial property banner; however, these tend to have more in common with residential property investments, especially when it comes to property management.
In general, commercial properties tend to have higher rents and longer leases. Five-year leases aren’t uncommon, which means that owners have less turnover and don’t have to worry about finding new tenants regularly. However, when a business leaves a space, it can take longer to fill the vacancy. It’s not unusual to take six to nine months to fill a vacant retail or industrial space.
There are many benefits to commercial investment. Many investors find businesses easier to deal with as they’re more likely to interact professionally, pay rent on time and keep the property well-maintained. There are also fewer overnight maintenance calls, since most businesses are closed during the night. Commercial property investors also have less competition for properties. As it’s seen as difficult to get into and manage, there are fewer people looking to buy commercial spaces.
As there are fewer laws governing commercial leases, there’s more flexibility when negotiating contracts. This allows commercial investors to sign triple net or NNN leases. These are agreements where the tenant pays real estate taxes, maintenance and building insurance, as well as normal fees like rent and utilities. These types of leases are especially popular with larger retail franchises that want to keep their space running smoothly and uniformly on brand. In general, investors with triple net leases only need to pay their mortgage and can remain hands-off with managing the property.
There are downsides to owning commercial properties. Firstly, they’re sensitive to economic conditions. People always need a place to sleep, so there will always be a demand for residential properties. The same can’t be said for commercial properties. During recessions or times of low consumer confidence, struggling businesses can find it hard to pay rent and may close. Additionally, chains may choose to close locations. If investors lose tenants during an economic downturn, it can be hard to find new ones or to sell the property.
Additionally, as there are more public visitors to the property, there’s more risk of property damage such as vandalism. There’s also the possibility of a member of the public being injured, so robust insurance is essential for owners of commercial property.
What Services do Commercial Property Managers Provide?
Property manages are a valuable asset for many commercial property investors. There’s a larger time commitment involved in managing commercial spaces, including multiple leases, ongoing maintenance and public safety concerns.
Commercial property managers handle many of the same tasks that residential property managers do, including rent collection, maintenance, lease renewal and finding tenants. However, there’s a lot more involved in running a commercial site and a property manager can take over many, if not most, of the jobs required.
After finding new tenants, commercial property managers can negotiate leases and manage tenant relations. They conduct market rent analysis to advise owners of the correct rent and ensure their negotiations with new tenants are favorable to owners.
Commercial property management companies also help run the property as a business. They can develop and monitor the property’s budget and report any needed budgetary adjustments to the owner. They also keep financial records and reports for the owner. Other record keeping includes documentation required to stay compliant with federal, state and local laws and regulations.
Along with handling emergency maintenance, property managers can organize maintenance routines so preventive programs are taken into consideration. They can also recommend upgrades that can increase the value of the property. Managing maintenance can include preparing specifications for work that needs to be done, obtaining bids and supervising projects.
Management planning is another service offered by commercial property management firms. This involves analyzing the environment, planning a marketing strategy and showing the owner how they can meet their objectives for the property.
How Much Does Commercial Property Management Cost?
Commercial property management costs are generally calculated as a percentage of rents. In most cases, fees are 5 to 12% of gross rents. Some management companies charge a flat fee, or a flat fee plus a percentage of rents. Flat fees can be beneficial to owners if rents are increasing regularly, although there’s less incentive for managers to keep tenants in the property.
The cost can vary depending on many factors, including the location, type of property, quality of tenants and specific services they’re expected to perform. Properties that require less time to manage may have a lower fee.
Property management firms may charge additional fees for other tasks. This can include fees for lease renewals or finding new tenants. The costs of maintenance and advertising are generally passed on to the owner and it’s also common for firms to charge a maintenance markup fee. This is a percentage of the cost of any repair work to cover the cost of arranging the work. Make sure you ask about the fee structure before you sign a contract with a property management firm and understand exactly what’s covered.
Who Should Consider Property Management for Commercial Property?
There are many benefits to having a commercial property manager look after your commercial property. They understand the laws and regulations and can make sure you’re complying with all applicable regulations. They also have experience with managing these types of properties, so they know what maintenance is required, how to communicate with tenants and how to fill vacancies.
Commercial property management tends to take more time than other forms of property management due to complicated leases and larger numbers of tenants. Investors with regular employment may not have the time to dedicate to contract negotiations, ensuring paperwork is compliant and organizing regular maintenance. Other investors may not have the experience or even desire to deal with the details of owning commercial property. For these people, commercial property management is an essential part of an investment plan.
There are some people who may not require commercial property management, including investors who’ve been commercial property managers themselves, and those with knowledge and experience in contracts, negotiations and the laws surrounding commercial property. However, even people with experience may choose to hire a property management firm, as it frees up their time to look for new investment opportunities or enjoy the profits from their investment.
What to Look for in a Commercial Property Management Company
Experience is a key trait to look for in a commercial property management company. They should have experience managing the type of property you have and the type of client you are. Managing an industrial site is very different than managing an office block. Similarly, managing for an individual investor is different to managing for an investment group, particularly as the reporting requirements are very different. Always ask about their experience and to speak to existing clients and tenants so you get honest opinions about their abilities.
Credentials are another sign of experience. The Institute of Real Estate Management offers the Accredited Commercial Manager course for people who are serious about commercial property management. Additionally, companies can become Accredited Management Organizations.
Look at the company’s size, longevity and operational stability. Although not all large, long-running companies are good at what they do, these traits can be good indicators of quality. For the owner of an investment property, operational stability is also an important consideration. This refers to the company’s staff turnover rate and succession planning. If your property manager wins the lottery and immediately quits, will there be someone with the knowledge and skills to take over managing your portfolio? If there’s a high staff turnover, it’s likely that the person you first met will be replaced quickly with a new staff member.
Lastly, remember that your property manager will be your representative with your tenants. Think about whether they present themselves well. Are they professional? Do they have honesty and integrity? If they don’t speak politely to you, how are they going to treat your tenants? It’s likely that this person will be someone you have to communicate with regularly, so make sure they’re someone you like along with being experienced and capable.
Many owners of commercial properties don’t have the time or experience to manage the complex contract negotiations, maintenance and planning required by their investment. A commercial property management firm can take over much of the day-to-day running of the property, as well as long-term planning, to help make your commercial property investment a success.