Posted: Nov 2, 2018 in Education
What most commercial landlords don’t want you to know.
With a simple orientation in the basic principles of commercial real estate, you’ll be able to just look at a building and understand how much it is likely worth and estimate what rents would be needed in order for the owner to afford the mortgage payments. It’s really not complicated. It takes about twenty minutes to learn. And there’s a bit of math. But just a little bit.
Here’s the first thing worth knowing: The value of a commercial property is determined by the strength and quality of its tenants. If you are an operator in a building, you are creating value in that building by activating spaces in meaningful ways. We can show you exactly how this works. But this is a fact and, due to a number of key factors, it is particularly true in the Edmonton market.
Commercial development requires three primary ingredients: A) physical space in the form of land or buildings, B) capital in the form of debt and equity, and C) an operator to activate the space with adequate ‘covenant’, (i.e. the capacity to responsibly commit to a 3-10 year lease obligation).
In Edmonton, when we find A + C, there is no shortage of B. But when A + C aren’t present, B can be scarce. Further, there is generally an ample supply of land and buildings in need of development (ingredient A). So, the only true limiting factor in this market is the availability of quality operators with robust covenant.
The typical approach to this problem is to hire leasing agents and compete for tenancy market share. But if we want to curate the activation of our buildings purposefully, we have to find operators whose work is meaningful. At Sparrow, we consider meaningful work to be on a spectrum between these two categories:
- operators who enhance the cultural fabric of neighbourhoods, and
- operators who contribute to the resilience and future relevance of the regional economy.
The challenge is that the number of quality operators, those whose work is meaningful and who also represent a robust covenant, is a limited circle.
So. The first thing to understand is that you, as the operator, are the driver of commercial value.