Commercial RE Question

[strickn]

Are office rents quoted on an annual per square ft basis? Is this just because there's more flexibility in purchase sizes going on than for the kind of apartment we talk about in monthly terms?

Skimming an article from the height of the Manhattan Imaginary-Future-Value Decade, I see,

"...the Seagram Building. 'It’s such a beautiful building,' Mr. Durst said, 'and those rents that people are willing to pay to go there!'

...impresses landlords in two ways: It’s absolutely the hallmark to any portfolio, and it’s a huge moneymaker, with eager tenants dropping well over $100 per square foot... It’s a bit less than 800,000 square feet, so the Seagram is the only site on the list that wouldn’t clear $2 billion. It is a building however, that would probably clear $2,000 per square foot."

My puzzlement is that if one could gross (800K*100+) and net fifty million or more every month, then even a multibillion-dollar building would be minting money inside of five years and it would be worth a much larger multiple of the monthly rate (than this, above) to prospective owners who bid. If it is a yearly rate, then it makes more sense.

[kylejack]

Yeah, I think they're per year.

[TheNiche]

Are office rents quoted on an annual per square ft basis? Is this just because there's more flexibility in purchase sizes going on than for the kind of apartment we talk about in monthly terms?

Office rents are typically quoted per year and on a Triple Net (NNN) or Gross basis. There is often a Tenant Improvement Allowance (where the landlord pays the tenant up to a certain point for leasehold improvements) as well as an Escalation Clause (that governs rent increases over the term of the lease, which is frequently many years).

Apartments are strictly on a Gross basis, tend to have shorter term leases, and are much more commoditized than is any other kind of commercial real estate. Additionally, apartment management must negotiate to the lowest common denominator and cannot price discriminate according to the user's characteristics, so there's not as much room for creativity.

[312]

Are office rents quoted on an annual per square ft basis? Is this just because there's more flexibility in purchase sizes going on than for the kind of apartment we talk about in monthly terms?

Skimming an article from the height of the Manhattan Imaginary-Future-Value Decade, I see,

"...the Seagram Building. 'It’s such a beautiful building,' Mr. Durst said, 'and those rents that people are willing to pay to go there!'

...impresses landlords in two ways: It’s absolutely the hallmark to any portfolio, and it’s a huge moneymaker, with eager tenants dropping well over $100 per square foot... It’s a bit less than 800,000 square feet, so the Seagram is the only site on the list that wouldn’t clear $2 billion. It is a building however, that would probably clear $2,000 per square foot."

My puzzlement is that if one could gross (800K*100+) and net fifty million or more every month, then even a multibillion-dollar building would be minting money inside of five years and it would be worth a much larger multiple of the monthly rate (than this, above) to prospective owners who bid. If it is a yearly rate, then it makes more sense.

The rates can be quoted monthly, or annually. The N.O.I. is going to be a huge factor in determining a sales price for a investor in an income producing building. Longer term leases in commercial typically increase the value of a building. Short term leases typically (in my opinion less than 3 years) don't really add any value. Apts. are a different animal and the rates take into consideration a tenant roll with frequent rollover. In a strong market I typically see base rental rates and NNN's separated in class "A" product and new buildings. Some landlords may prefer using C.P.I. In a weaker market I see more class "A" quoted on a full service/gross basis. Every landlord is different and as a result you will probably find several different variations of how a lease is stuctured and the variation will differ more when considering industrial space or retail space as well. I hope this helps.

[houston10]

"hen even a multibillion-dollar building would be minting money inside of five years " I have seen most properties with a cap rate of around 10%. So if you bought in cash you would get a 10% return and your investment would be paid back in 10 years. Of course most people dont buy in cash.