I mentioned in my earlier post that I have been learning about the Commercial Real Estate business due to my involvement in trying to get a Masonic Lodge built. I am by no means an expert but here are a few terms I have learned in trying to get a grasp of the market in rentable office space.
Net Rentable Area. This is the total number of square feet of rentable office space in a given area. In my case we are talking about the area of Mountlake Terrace and Edmonds. Not included in this number is office space that is owned outright by its occupants. It is all the space in the area currently being rented plus all the space that is currently vacant but is on the market to be rented. This number is important, not only because it is critical in determining the areas Vacancy Rate, but it also tells you what sort of impact your new building may have on the existing market. For instance you may have a vacancy rate of 10%, but if your new building will double the amount of office space in the area, then there is a good chance that adding that space will have an impact on the vacancy rate…basically you are drastically increasing supply and chances are that demand will not increase significantly so prices will go down. In my little venture we will be increasing the Net Rentable Area in Mountlake Terrace and Edmonds by about 2%. I believe this change is small enough that we should be able to maintain the current vacancy rate in the area. In fact, considering our location and the fact that we will be new construction, I’m hoping we will be reducing the vacancy rate in the area.
Vacancy Rate. The vacancy rate is the percentage of the Net Rentable Area that is currently not rented. This is probably the key market analysis number that investors need to be aware of. An area’s vacancy rate is probaly a good indicator of what the vacancy rate in your building will be. Therefore if you need to have 2/3rds of your building full in order to break even, and the vacancy rate is 11%, then you should go ahead and invest since 89% of your building will be projected to be full (well past your 2/3rds requirement). My gut tells me that vacancy rates are not all they are cracked up to be. For instance, say the current vacancy rate in our area is 20%. In preperation of building our building we start lining up renters and say we get to 60% of the space rented. I’m told banks will not loan you the money to build until you have 60% of your rentable office space committed. Now in all the office space rental situations that I have been vaguely a part of (about 4 situations that I know of) the length of lease has always been 5 years. So if we are at 60% today, you know you will maintain at least 60% over the next 5 years. But the remaining space does not come off the market. Agents will continue to try and rent out the space. Therefore you would expect that the occupancy rate in your building will increase over time as the last few chunks of your building’s space is rented. After five years, you may find that some of your renters will leave as their first lease finishes. But the good news is that inflation will kick up rents so you won’t have to maintain as high a vacancy rate to break even.
I will leave it at that for now since it is getting late. More real estate terms ahead.