Commercial Retail Vs. Warehouse. Which is better to list as?

Question

Taylor Hazard · Answer

Lots of questions, i'll answer in order. Let me know if i miss something.

Regarding automotive uses, review the zoning restrictions like a hawk. Comparable zoning in Seattle would only allow for a Pep Boys type auto use, no service or maintenance.

Regarding co-listing it will come down to your relationship with the other broker and the division of work, again it sounds like it would be a disservice to your client to list it on your own. This is not an indictment on you as a broker, your skills or abilities but purely a factor of the product type. Not only would I not list a residential property, but I personally wouldn't even attempt to list a retail property without bringing in someone experienced in the product type. The commercial world is highly specialized and your ability to speak too the needs of retail tenants and buyers will be key. For example would you know how to negotiate a percentage lease vs. NNN lease vs. modified gross lease? What would be considered a market term for the building use?

Regarding CAP rates. Yes, a cap rate is one input used to calculate real estate values but a cap rate in a bubble is nothing more than a data point. Cap rates vary greatly from product type to product type and are highly dependent on lease terms and tenant. For example: a retail building located in the CBD and leased to Pep Boys with 15 years left on the lease might achieve a 5 - 6 cap on the open market whereas an industrial building leased to a mechanic with 3 years left on the lease is probably 10 - 12. This is another example of why your success or failure could depend on putting the right team together for the assignment. A good retail broker will be able to rattle off expected and market cap rates in his sleep. Without answering some of the above questions it would be inaccurate to use a cap rate to predict a sale price. Once the building is leased and you can fill in the blanks. I would then recommend using the cap rate AND sale comps to arrive at a strike range on price.

It also sounds like you want to derive a purchase price for the building out of a cap rate, for which you need a lease rate so again, what are market lease rates? Do you have empirical evidence to demonstrate to a tenant/buyer/client what lease rates should be?

Taylor Hazard · Answer

Ok, with zero knowledge or experience in the intricacies of the Statesboro Georgia zoning regulations its sounds like a majority of industrial uses will not be allowed (think manufacturing, distribution, assembly, landscaper, construction etc.) and the space is traditional retail. what is the clear height of the building? My guess is 18' or less, which will also limit the number of uses.

If you think about retail uses they have to put inventory somewhere. A Discount Tire is majority "warehouse", this is doubly true for small/local business that don't have the advantage of a massive distribution chain of someone like Starbucks for example that can delivery fresh inventory daily or every few days.

Coupled with the zoning issue and your inexperience in the commercial world I would be very careful about marketing a space for industrial uses. If I were in your shoes I would hire a commercial broker who knows the product type to co-list the building with me, which really is in the best interest of your client. Im an industrial guy but if i came across someone who wanted to buy a house I would 100% refer it to a competent residential broker.

Im also still confused about how cap rates impact your decision making process? A cap rate can be a great reference point, but is really only relevant to you as it relates to your clients goals for the property, target lease rate and if you are going to sell it as an investment.

Taylor Hazard · Answer

When you say warehouse do you mean industrial? Or is it a big box retail location that "feels" like a warehouse (think Costco or big furniture stores)? Big difference between the two.

What is the zoning? If its an industrial building traditional "retail" uses likely wont be allowed and similarly if its a retail building chances are good that most industrial uses wont be allowed. Zoning boards usually try and avoid any situation that could result in a daycare next to a manufacturing facility for example.

Irregardless of your answer to the above questions you will want to position the property for its highest and best use, which will in turn attract the largest tenant pool.

How do cap rates come into play? is your client interested in selling the leased property as an investment? Best way for market intel is using your broker network, call the brokers you have a good relationship with and ask for input on lease comps and cap rates.

Steve McGovern · Answer

Actually you nailed it:  LLs are "charging them differently."   In the retail setting the LL pays it and charges it back. in the warehouse, the Tenant pays them direct, in many cases.

Think about the management of this matter-- we'll cover the three main "Ns":

Taxes are (relatively) constant between the two asset types, all-else equal.   (In each case, Trade fixtures, personalty, chattel, etc. are all taxed to by the Occupant where applicable, and rarely if ever become part of the real estate. the retailer's tax may be greater, but not based solely upon the property tax.)

Insurance cost is not perfectly similar, but similar enough-- again, assuming all-else equal.  Liability, on the other hand, is the concern of the occupant in a warehouse setting, and often contains provisions to limit the Owner's liability almost down to nothing, notwithstanding a roof collapse.    If a palate falls off a rack and crushes a worker...  well, the racks, forklifts, and product all belong to the warehouse, not the Owner.  In a slip & fall in a mall or neighborhood center,  on the other hand, everyone's getting sued, even if the slip was the result of spilled coffee in front of the Dunkin' Donuts.

Now Consider the maintenance between upkeep of a glistening bright welcoming mall on the highway interchange and the 'perfectly sufficient' but a little dingier space on the road with the potholes behind the highway and over the tracks.  The tenant in the retail space is (nine times out of ten) a passive participant in the management of the retail space, whereas (s)he is a very active one in the warehouse.  Furthermore, what maintenance (s)he can slide-by with in the warehouse space-- basic maintenance around $2 or $2.50 psf now must be perfected and gilded and cleaned on a weekly basis (at a minimum)  in the retail setting and costs him/her somewhere around $6 psf.

On the LL's side (your client) it may be that they're happy to relinquish CONTROL to the tenant in exchange for a lower rate.  Furthermore,  the leases can sometimes be longer terms (10+ years, first term is not uncommon in a warehouse) and include less protections for the Tenant.

Ryan Beasley · Answer

@Joel Owens Thank you for the info. Compstak unfortunately doesn't have any data for my market here in Statesboro, Pooler, Savannah and doesn't have it for Augusta, GA either. I feel as if I'm going to have to call and go door-to-door to different owners and tenants to get lease/cap rates in my market. I would call local brokers but they wouldn't give me the info even if their life depended on it.

@Steve McGovern So, in both cases the tenant pays all the NNN's? From what I've read the landlord just charges them differently on Taxes, Insurance and maintenance. I understand the % charge of sales/sqft past a certain breakpoint, I'm just a little confused on how these two tenants differ in how they pay their NNN's. Could you or @Joel Owens elaborate on that for me?

Steve McGovern · Answer

@Ryan Beasley I am also not familiar with the conventions or Zoning in your area.  You got tons of great advice from pros above.  I'd pay particular attention to the unique specializations between the types that @Joel Owens  called out.

The typical leases and LL responsibilities will vary WILDLY between these two asset-types-- in fact, I think I can safely assert that they're at the opposite ends of the management-control and responsibility spectrums.  Retail Lessees pay out the nose, are responsible for NNN charges for improvements that they  don't control, and often pay additional rents based on breakpoints-- BUT the Owner has to be able and willing to make all the top-tier improvements and maintain the property at the highest level for the sake of the general public who will visit this merchant.

On the other hand, Warehouse/flex space is typically "all in" at the Tenant level:  Taxes, maintenance, insurance, and all matters are handled directly by the Tenant in usual cases.  The only visitors are those who are employees or have direct relationships with the Occupant. Rarely, if ever, is a warehouse visited by the transient public.

No doubt you're correct that you can do a better monetary job on behalf of your client with a Retail Use/Occupancy, but you also need to consider the rest of the fiduciary duty:  There's much less accountability, stress, concern on the part of a warehouse owner than a retail owner.

I would take a good look at your client.  If (s,t)he(y) simply don't have the appetite or ability to manage a retail space, then they may know best.

Joel Owens · Answer

For lease data many tenant rep brokers use Costar but it is crazy expensive.

Another source is https://compstak.com/

If you want to go Industrial/Warehouse this company does a lot of it in GA.  http://kingindustrial.com/main/careers

Joel Owens · Answer

If YOUR BROKERAGE does not focus on commercial real estate then do not take the listing. It is a disservice to the property owner.

If there is another commercial brokerage friend you know and trust that is experienced in this asset type then maybe for a 10% referral fee you hand it off or partner up. You could make a condition of the referral that you see how the broker handles the transaction so you learn along the way.

Commercial is highly specialized. I do not focus on selling industrial buildings just like someone selling industrial does not focus on what I specialize in which is retail. To do it effectively and at a very high level you need to specialize. In some weak suburban to rural markets you have ( one stop brokerages) that are dabblers.  They do mainly residential but occasionally list raw land or sell mom and pop mixed use under 1 million in price type stuff. When you get into urban core to suburban markets there are specialist companies that only focus on a certain core asset type in commercial.

So if you are located in the middle of nowhere then staying at a small all in one shop might make sense and when you have a large project partner up with a bigger company. If you want to only do commercial then you need to leave the residential brokerage and go work at an only commercial firm.

For this property you need to look at not only what it is currently but what is the highest and best use. Maybe take a zoning attorney to lunch to talk about the land some and get some nuggets of gold. Sounds like the property owner is talking to many brokers and only wants to deal with who brings them an offer.

Those smaller deals I do not work on. I only work on transactions where the seller or buyer is committed to me only.

Good luck.

Ryan Beasley · Answer

@Taylor Hazard and @Ethan Atkinson Sorry forgot to tag the both of you in the post.

Commercial Retail Vs. Warehouse. Which is better to list as?

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