What is Commercial Real Estate Development?

Any property used exclusively for business-related purposes or to provide a workspace rather than a living space is known as commercial real estate. Most often than not, commercial real estate is leased to tenets to facilitate income-generating activities. This broad real estate category can include anything from a shopping centre to a single storefront. 

Commercial real estate includes several categories such as office spaces, hotels and resorts, healthcare facilities, strip malls and restaurants. 

And today, we will help you understand what Commerical real estate is, the developmental process and the technical know-how behind the same. 

What Is Commercial Real Estate Development?

Commercial real estate development means starting construction at zero level and converting these ideas into actual commercial investment properties. These commercial real estate properties involve office buildings, industrial facilities, retail centres, and other commercial properties. 

In simple words, commercial real estate development means delivering a product and meeting customer requirements. But, here, the expansion is more complex than it seems. It is because real estate development includes the participation of expansive professionals like architects, engineers, lenders, contractors, and many others. 

What Does a Commercial Developer Do?

A Commerical developer is responsible for purchasing, building, managing and leasing commercial real estate. A commercial developer can either be an individual or a business. The role of a developer is to coordinate the use of space for business purposes. In the purchasing phase, a developer may decide to purchase a plot of land or an existing building. The individual is responsible for confirming that said purchased land is a zone for commercial use. Below are some examples of responsibilities that a commercial developer has to partake in. 

• Site selection and evaluation,
• Contract negotiations,
• Zoning and entitlements,
• Architectural and engineering studies,
• Placing the entire capital stack,
• Bidding out and overseeing the construction,
• Coordinating the leasing/sales team, and many more.

The purchase of property is financed with a mortgage on the property. Moreover, in a typical arrangement, the commercial developer purchases land. Further, the developer obtains the amount for the construction of an office tower and signs the lease agreements with tenants. The profit earned comes after selling or leasing space to other businesses or customers. 

The commercial developer may have to look for maintenance and basic sustenance if he purchases an existing building. A commercial developer can easily manage commercial buildings by focusing on everyday issues, tenant applications, structural management of the building, repairs, and relationship management. 

Commercial Real Estate Development Process

Commercial real estate development is a vast process and includes several stages. You will find step-by-step guidance on commercial property development in the given-below list.

• Selection of Site and its Evaluation
• Negotiations on Contract
• Zoning And Permissions
• Engineering And Architectural Studies
• Putting Comprehensive Funds
• Outbid And Construction Supervising 
• Coordinating With Marketing And Leasing Team

Selection of Site and Its Evaluation

The key to selecting a proper location for commercial real estate development is to evaluate the features and development rate of the area. Before choosing a site, it is mandatory to ensure the requirements and characteristics of your project. 

As a commercial developer, you can find the site on your own or hire a third party to perform the same. However, make sure to check the below-mentioned tasks before finalising any commercial property location: 

• The traffic coming to the location site.
• The topography of the selected area.
• What are primary landmarks and interstates?
• Is the location easily accessible?
• The overall infrastructure of the locality.
• What is the demand for their product type?
• What are the zoning areas and land use?

There are many other factors that you must keep tabs on. However, if your shortlisted sites pass the above factors, then you are good to start with your commercial property development.  

Negotiations on Contract

Negotiation over contracts is the subsequent process after selecting the site and evaluating its value. The negotiation is quite a precise step that the commercial property developer offers on their property. These offers are available for negotiations for the purchase and sale agreements. 

During negotiations on such contracts, you must have the right professionals to represent you appropriately in front of organisations and clients. However, hiring an attorney to handle negotiations and the amount of work is a great idea.  

Zoning And Permissions

The zoning and permission step includes meetings and discussions with council members for the city’s approval. During this process, you must bring your team of engineers, architects, and other professionals to have a better presentation to the officer who will sign the rezoning documents.

Engineering And Architectural Studies

It is attainable that as a commercial developer, you have an educational background in architecture or engineering, but it is always beneficial to hire organisations to develop your commercial property. These experts’ role is to ensure the most feasible development plans and processes. These things result in successful and budgeted commercial developmental projects. 

Putting Comprehensive Funds

What does it mean to use unlimited capital funds? The capital stack is the debt and equity structure for commercial property development. There are several ways that this fund can be used all together, depending upon the project type, developer’s need, and equity partners.

Some commercial developers place equity proportion independently, but other groups have several investors from whom they can source the funding. This full capital stack includes the following:

• Equity
• Preferred Equity
• Bridge or Mezz Debt
• Bank Debt

Outbid And Construction Supervising

After you finalise the plans with other professionals, you have to send the plans and outlines of your project to general contractors to explore the circumstances of moving forward under budget. Since there is always a flux in construction, labour and material costs could impact the overall project costs. Therefore, it is wise to know costs with your team before outbidding the construction. Further, these bids are helpful for loan approval and serve as a budget during the construction process.

Coordinating With Marketing & Leasing Team

After commercial real estate development is completed, the marketing, sales, and lease teams play a prominent role. Thus, it is crucial to involve them during the early stages of your l project so they can market them off early and at better prices. 

You must coordinate with the marketing and sales team to find the ideal clients or renters to get some funds as a pre-sale activity. The marketing team may include online marketing, PR, site tours, negotiations, etc.

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How to Get Into Commercial Real Estate Development?

The secret to getting into commercial real estate development is to function under a more seasoned one with enough experience in the field. Before starting your commercial real estate development, it is crucial to have some hands-on experience. 

Working with someone with specialised knowledge is a great way to start. Another benefit is that you will get the chance to explore valuable resources that include professionals, monetary amounts, and investors. You can make contacts to grow further. 

To work under any commercial property developer, you can join them as a business analyst, project manager, or as their assistant. Every role will give you an experience from ground level to all the upper levels. Once you are confident about your knowledge and expertise, you can dive into the commercial real estate development business immediately. 

Pros & Cons of Investing in Commercial Property Development

Before you get into commercial property development, you must know the advantages and disadvantages of commercial property in the real estate industry. They are as follows:

Pros of Investing in Commercial Property Development

No Cost of Furnishing: The most significant advantage of investing in commercial properties is the zero investment in the furnishings. It is because once you lease out the floor or building to the renter, they pay the furnishing price. As an investor, you just have to provide raw property. 

This is advantageous because any organisation renting the property has to follow specific guidelines for performing functions. For example, a bank will have a different design and a general store will have a different structure even though they are in the same building. 

Steady Income Flow: The income from commercial property is stable and consistent compared to residential properties. This constant flow of income is not affected by any uncertainty. The rental amount is assured as the commercial tenants have a longer lease duration.

Easy to Deal With Occupants: Another benefit of investing in commercial property is that the tenants are usually corporate, bank, or retail chains. These commercial tenants are easy to deal with without running from the rent agreement.  

Elevated Rental Income: Commercial properties’ rental yield is higher than residential ones. The rental amount is usually in double digits from commercial property. Investing in commercial real estate is one of the most prominent advantages. Sometimes the rent difference is 12% to 14% if the location and condition of the building are good.  

Cons of Investing in Commercial Property Development

Hefty Investments: One of the immense disadvantages of commercial real estate is that it requires an extensive investment. The investment in residential properties is lower as compared to commercial ones. Therefore, you must be ready to invest a hefty amount for investing in commercial properties. 

Pricier Loans: Commercial property loans are costlier than residential properties. The rate of interest, terms and conditions all depend on the property type, investor profile, location, and repayment tenure. Further, the procedure of availing of loans is quite complex, and the banks or NBFCs take a longer sanction time. 

Fewer to Zero Tax Incentives: Investing in commercial property does not provide any tax incentive to the investor. Overall, there is no tax benefit on the repayment EMI, no tax rebate, and many more. It is one of the crucial cons while investing in commercial real estate. 

Hard to Find a Tenant: It is hard to find the right tenant for commercial properties. The property remains vacant for more extended periods when one lessee moves out. Therefore, as an owner, you must keep some amount safe for EMIs for a period when one tenant is moving out, and another is moving in. 

Maintenance Sufferings:  The maintenance of big commercial buildings is a larger expanse. Therefore it is one of the drawbacks of investing in commercial properties. The renovation of a commercial setup is a massive cost. 

If you are investing in commercial properties, you must understand even for renovations, loans are available only for residential properties, not commercial ones. 

Bottom Line

Commercial real estate development creates something the tenants want and need. The construction of your commercial properties must be exclusive and different from the competitors’ commercial properties. As a commercial property developer, you must offer various USPs to lease out your commercial property and earn stable rents for long terms. Moreover, after knowing the pros and cons of investing in commercial properties, you know how to begin the process of commercial real estate development.

FAQ’s about Commercial Real Estate Development