Commercial development is an extremely complex topic on which you could expound for thousands of pages. There are volumes about the topic, with a multitude of differing opinions on how things should be done to best suit a property(s).
To have a complete understanding of the inner workings of developing commercial property is near impossible, but there are some basic principles that, if followed, will set a new commercial developer up for success.
Locating the perfect lot, building or rehabbing infrastructure, and leasing out your space are only a small part of the complex but rewarding world of commercial development. Besides that, there are many things that, if overlooked, can create stress and financial catastrophe.
In this overview, we will go over the basics of everything you need to know about developing commercial property and how you can avoid some common pitfalls in your next venture.
What Is Commercial Development
Let’s get the basics out of the way; while you may have found yourself here with a general knowledge of commercial development, it is always good to have a clearly defined idea of what exactly you are trying to build upon. From building retail space to developing existing properties into multi-use units, commercial development entails many different things.
Every form of property that doesn’t deal primarily with living areas is included in commercial real estate development, including retail stores, malls, shopping centers, industrial parks, petrol stations, office buildings, restaurants, convenience stores, hotels, and motels. In many cases, these properties are zoned for commercial only.
Benefits of Commercial Development
Commercial development can be a high-risk real estate ecosystem, especially in today’s volatile economic climate. However, there are several huge advantages that commercial development has over other real estate developments.
Commercial developments typically yield much higher profits, especially when built on the right piece of land. By utilizing GPS mapping, and demographic data, finding the right area has never been easier.
For current or planned leases, the cost of renting or selling is calculated using a rate per square foot per year. As a result, in comparison to the site and rental agreements, the building or replacement cost is of low value.
Simplicity and Scaling
When developing commercial properties, very little space is wasted if the property is built correctly. This allows for maximizing the leasable area. In addition, the external finishes and structure of the building(s) are typically similar, if not the same. This makes it easy to add on and expand your rentable space.
While residential development can be efficient, commercial developments, especially office complexes, can be built to maximize the efficient use of a building. This is done by building to the most permissible plot ratio.
Utilizing Anchor Tenants for Stability
Anchor tenants are the golden egg of commercial development. Finding long-term commercial tenants (especially well-established businesses with predictable profitability) or government agencies can offer a developer a stable cash flow with little worry. In many cases, anchor tenants are either department stores or major retail chains and can be a huge draw to commercial development.
Once you have a solid anchor tenant with a high level of brand awareness, this can draw other shorter-term tenants in, as well as customers for the entire ecosystem. Anchor tenants are key when developing shopping centers and mixed-use facilities.
Risks of Commercial Development
Along with the positives, there are a few disadvantages that can cause new real estate investors to shy away from commercial development. For one, it’s not all rosy for commercial developers, as they deal with many of the same problems as they do with residential, just on a larger scale.
Commercial property is often much higher than residential, and building expenses are as well. Because of this, a much higher level of capital is necessary to get a commercial development planned and off the ground. Commercial properties require much more intricate infrastructure, sometimes needing expensive sprinkler systems, expansive HVAC, and complicated plumbing and electrical.
When negotiating with potential tenants, most renters looking for commercial spare are business people. They will often approach lease negotiations with a strong business mindset and have access to a business lawyer to cover anything that could be missed. Commercial leases are complicated, and for them to be fair, a developer needs to show up with strong bargaining skills.
Meeting Complicated Needs
One of the biggest differences between residential and commercial real estate development is how much more complicated commercial renters’ needs are. Many commercial clients will need complicated buildouts that could be less than suitable for future tenants of the space, so longer lease terms are almost always a must to recoup the investment.
Because of the complex nature of a commercial project, you will likely need strong administration and accounting systems in place. More often than not, a full-time property manager will be necessary, as well as access to an accountant, and lawyers, just in case.
The Commercial Development Process
Once a real estate developer decides on a plan to commercially develop a property, a complex process begins. There are many moving parts, all of which are inextricably linked together in what could easily be described as an orchestra. Each player has a part to play, and the lead developer acts as a conductor to ensure that everyone is on time.
Site Evaluation and Selection
Once a project is proposed, and capital is available, it’s time to find a place to build a commercial development. This process is one of the most important parts of the process, as it sets the temperature for everything to come. When it comes to picking a site, developers are looking for:
- Traffic counts
- Proximity to landmarks and interstates
- Ease of access
If a site has the right balance of these things, then it’s time to enter the next step.
Working alongside a commercial real estate broker and a lawyer, it’s now time to make an offer and begin negotiations. As straightforward as this should be, it can often get complicated as property owners may have other offers on the table.
Zoning, Architectural, and Engineering
At this point in the game, it’s time to lean on your network of professionals, as things are about to get very complicated. When it comes to developing a property, it must have the correct zoning and entitlements for your intended use. In some cases, properties can be re-zoned, but that is not always the case as it is a political decision and requires city approval.
Once zoning is approved, it’s time to begin working with an architect and engineering firm to determine how to maximize the site that you are planning to develop. This can help garner approval from the community since they can showcase the possibilities of a site with visuals.
At this point in the process, it is also very important to have a good idea of what is going on underground. Hiring a utility locating service is a must before breaking ground in the next phase. While calling 811 before you dig the law for more details and to find targets beyond public utilities (the scope of 811), you should seriously consider a professional underground utility locator service.
After plans have been finalized and all funding has been secured, it is time to begin the construction of the commercial development. Developers will need to bid out the development to different contractors and choose the one that not only bids inside the budget but also is the best fit for a project.
Construction almost always goes over budget or beyond schedule, so keep these things in mind during this part of the process.
Marketing and Leasing
As construction begins, finding tenants becomes a key part of the process. It would be pointless to have a beautiful, modern commercial development that is empty. Building solid marketing and sales team is key to successful commercial development. Quality marketing, alongside a good sales team, will ensure that a property is full and profitable.
Developing a commercial property is a high-risk, high-reward venture, but when armed with a deep knowledge of commercial real estate and a solid team, anything is possible. While only a small part of the process, it is imperative that you get a full picture of what is happing underground before you begin your project.
SitRep Services offers cutting-edge ground-penetrating radar, concrete scanning, utility detecting, and ground fault locating services for residential and commercial projects within a three-hour radius of Atlanta, so you may dig with confidence. Contact us today to set up your service.