46: Commercial Real Estate
The average home in the U.S. is currently worth just over $226,000. In contrast, the average commercial deal handled by REALTORS® is about $1.6 million.
About This Episode
Many of our listeners work primarily in residential real estate, but there’s always curiosity about that other side of things. Commercial real estate is what builds our cities and fills out our malls, and there are many opportunities for you to make it a part of your business.
In this episode we discuss the effects of COVID-19, the growth of west coast cities, and the future of commercial real estate.
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JON: If you live near a major American city, chances are you can spot some construction cranes dotting the skyline. The number of cranes mingling with tall buildings is a pretty good indication of the overall growth of that city, and over the past few years America has seen a lot of them. In 2019, Los Angeles and Seattle were tied for the most cranes, at 49 each. The west coast had 159 cranes total, compared with just 69 in east coast metros. If you were to compare the population growth of west coast versus east coast over the last few years, it follows the crane count pretty closely.
JON: Obviously it’s not the single family home that these cranes are building, and while many of our cities’ newest skyscrapers are residential or mixed use, a large portion are retail and commercial office space.
JON: Hello and welcome to Shop Talk: The Real Estate Show. I’m Jon Forisha, and on this episode we dive into commercial real estate, how it differs from residential, and how you can get involved in order to diversify your business.
JON: According to the Commercial Buildings Energy Consumption Survey, between 1979 and 2012 the number of American commercial buildings increased from 3.8 million to 5.6 million. Total floorspace increased in that time from 51 billion to 87 billion square feet. If you work primarily in residential real estate, then these numbers may sound pretty crazy. Even if you define it by football fields, that comes out to an absurd 1,510,416 football fields. It’s a lot of space.
JON: The American economy is always expanding, so it makes sense that companies would need ever more space. Who’s selling that space though? The answer is commercial real estate agents, who aren’t terribly different from their residential counterparts. Many agents dabble in a bit of each, and it’s important to understand the differences.
JON: In residential real estate, the whole deal can be completed with the help of just a handful of people. That’s not the case with commercial, which typically takes a large team of lenders, brokers, and underwriters. The purchase of a single family home is a very personal and often emotional decision, and that’s generally not true of commercial space. The bottom line is what matters when deciding on the perfect office or retail space, and the calculated ROI overrides any emotions.
JON: And then there’s perhaps the biggest difference between residential and commercial real estate: the size of the transactions. Houses can certainly go for millions of dollars, but the average home in the U.S. is currently worth just over $226,000. In contrast, the average commercial deal handled by REALTORS® is about $1.6 million. There are far fewer commercial spaces changing hands than there are houses, but with the higher price tag, commercial can be an extremely lucrative business.
JON: Becoming a commercial agent is remarkably similar to becoming a residential agent. In both cases you need to meet your state’s prequalifications and complete any required Pre-Licensing education. For a commercial agent, you would want to make sure to join a commercial brokerage once you have your real estate license. Though networking is always pivotal to success in real estate, it’s especially important for commercial transactions and the right brokerage can help you make powerful connections early on.
JON: An exciting aspect of working in commercial real estate is that there are several different roles an agent can fill. They could work with tenants or lessees by finding and negotiating new spaces. They could represent building owners or lessors by leasing out building space for the highest price. They could also represent investors who want to buy and sell commercial property for the highest ROI. In any scenario, a good client will likely rehire their agent for additional deals, and just a handful of solid accounts could amount to a healthy living.
JON: After the break, we dig into the future of commercial real estate.
JON: Are you listening to all of this wondering how you can get involved? Whether it’s residential or commercial, the world of real estate is vast and full of entrepreneurial opportunities. Get started online with The CE Shop, the leader in real estate education. Right now you can save 25% on your courses with promo code SHOPTALK.
JON: This all paints a rosy picture of working in commercial, but there are of course some issues. A big one that’s become pretty inescapable lately is what has been dramatically called the retail apocalypse. In 2019, American retailers announced 9,302 store closings, which was a 59% jump from 2018. Some predictions have been as bold as to say that 25% of American malls will close by 2022. Retail makes up a large part of commercial space, and the eradication of retail would be a big blow to the industry, not to mention the economy in general.
JON: And that of course brings us to 2020 and the coronavirus that’s kept us all inside for the last few months. To talk more about the state of commercial real estate during covid-19 is Jeff Erbert, Social Media and Content Marketing Specialist with The CE Shop.
JON: Hey, Jeff. Thanks for joining me.
JEFF: Hey, Jon, thanks for having me on the program.
JON: Absolutely. All right. So how has commercial real estate been doing over the last few months?
JEFF: Well, Jon in short strikes and gutters, some sectors like hotels, malls, movie, theaters, bars, and other non-essential retail have definitely been hit pretty hard over the past couple months. However, some demand for warehouses and other kinds of industrial use spaces has actually grown the most uncertain commercial real estate play though, I would say is definitely office space right now, according to a recent Gallup poll, only 41% of Americans who have been working from home actually want to return to the office as they did before the outbreak. So I'm thinking if companies start to share that sentiment, there'll be able to cut costs and have happier employees and it, it could result in a win win that might flood the market with office space.
JON: Okay. So there might be cheap office space in the future. Interesting. As far as the, the increased demand for warehouses, did you find any reason why?
JEFF: Yeah, it's just a more people are using the internet to conduct business and order things online. Retail is huge. So a lot of those shipping and fulfillment centers are a growing as I'm sure you've heard. So that's definitely fueling a major demand.
JON: That makes sense. Okay. So as far as retail and movie theaters is there any possible silver lining?
JEFF: Yeah, definitely. So I, I personally believe where there's a challenge, there's always an opportunity. So yes, and especially for real estate agents economists have been quick to point out that these hiccups are caused by external factors rather than fundamental flaws in the system. Actually analysts at Urban Land expect that the commercial market will only fall by about 7%. So compared to 2009 during the great financial crisis that's quite a bit better. I think it was 20.8% back then. So yeah. So once the vaccine hits the market, there'll be a lot of commercial real estate changing hands and businesses will get going once again and firing on all cylinders.
JON: Alright. So as you said, it's possible, we'll see a lot of empty commercial spaces in the next few months or even years. How can those spaces be repurposed?
JEFF: Oh yeah, definitely. So I think a lot of the restaurants, boutiques, medical offices and industry space. I don't think there'll be much change there. Those will probably return to normalcy pretty quickly. However, with some of these large retail properties and office spaces out there, I do know that some are being converted into residential properties. So that's one way to reuse that real estate. And then other companies are kind of taking a more interesting approach where they realized that people enjoy coming into the office for the social aspect of things. When I talk to friends and family who've been working from home for, you know, months on end, the first thing that often comes up is I can't wait to go back and see my friends at work. So that's, that's another option companies can do with their, if they're still kind of tied by their leases or looking at new spaces is creating office spaces that have larger meetings and amenities that focus on boosting the company culture for when the employees do come in. For example, Google, even before COVID-19, they do have places where employees can take workout classes. They have decompression capsules massage therapists and yeah, perhaps maybe companies could use, use the space for more of those things.
JON: So using them for more human comforts.
JEFF: Yeah, exactly.
JON: Hmm. Yeah. So what are some predictions for the long-term effects of COVID-19 on commercial real estate?
JEFF: So I think it's still a bit early to tell but I personally think developers are likely to shift their focus away from office space which could limit the amount of office space available over the next several years. However large companies can steer like a cruise ship sometimes, and that it takes them quite, it takes a little bit of time for them to change directions. So I think it all kind of depends on how many of these large companies adopt remote work policies. So, so we'll see how that plays out working remotely. Isn't something necessarily new as you know, it's been around long before COVID so yeah, many of those companies still chose to operate in a physical space. So I wouldn't be surprised if that happens in a post vaccine world. And if that does, you know, if they do choose to remain in a physical space and developers haven't been developing then we could see those prices start to kind of creep back up. Hmm.
JON: Okay. So like with most things, it sounds like kind of a mixed bag, some good, some bad, some who knows.
JEFF: Exactly like a round of golf, you have some good shots and you have some bad shots and yeah, just as long as you have a beer afterwards, there you go.
JON: Alright. Just have a beer afterwards and it'll all be okay. Okay, Jeff. Well, thanks for joining me.
JEFF: Yeah. Thanks for having me.
JON: Before covid-19 abruptly changed everything, the big story in commercial real estate was what driverless cars might do to our cities and infrastructure. In most cities, parking lots take up a huge swath of land. Large boring expanses of asphalt and concrete which serve no purpose other than being a place where you can park your car when you go downtown for a meeting or the big game. Though parking lots bring in a lot of revenue for their owners and the city, they’re eyesores, often dangerous, and a complete waste of space whenever they aren’t full. In an imagined future in which no one owns a car but you can rent one to take you from point A to point B, urban parking lots would become largely unnecessary. A lot of real estate could be freed up to become more interesting or useful things.
JON: There’s also a lot of conjecture about what to do with America’s malls. As more purchasing moves online and fewer people frequent actual brick-and-mortar stores, what do we do with these huge retail spaces built all over the country? This is where some commercial real estate ingenuity comes into play. Especially right now, when so many of us have been stuck in our own homes for the last few months, being able to physically go somewhere and walk around, even if you’re not actively shopping, can be a relief.
JON: When Starbucks was first starting out, their big idea was to make their store your Third Place. You already have a home and an office, but where do you go when you need to get away from those two? Your Third Place, a neighborhood coffee shop, stepped up to fill that gap. Much in the same way the coffee shop went from literally just a spot to buy coffee to today being a place to socialize, work from, and hold meetings, the mall needs to transform.
JON: And some of them already are. In New Jersey, the American Dream mall features an indoor water park, an NHL-sized hockey rink, a Nickelodeon theme park, and a first-of-its-kind indoor ski slope. If that sounds outrageously expensive to make and maintain, it is. But it also presents a new face to the struggling concept of a mall. It takes the idea of building retail around a major attraction just a few steps farther and it makes the mall into its own destination. Commercial real estate won’t die off because of ecommerce or coronavirus, but it will need to transform and adapt to modern day life in ways that it’s hitherto been reluctant to do.
JON: The nice thing about real estate is that it’s an expansive industry and you’re not tied to just one part of it. If you want to work residential deals while also flipping houses on the side, go for it. If you want to split your time between the residential and commercial sectors as opportunities arise, then that’s fine too. As you become more experienced in the industry, chances to try out new avenues will present themselves, and you’ll be able to expand your business in ways that may not even seem possible right now.
JON: That’s it for this episode, thanks for listening! If you enjoyed the discussion, you can leave us a review or subscribe to us on your podcast player of choice. Shop Talk is a production of The CE Shop.