Positive Net Absorption for the Phoenix Office Market. What Does That Mean?

 

With so much information available now on the internet I often talk with clients that read something and they are not sure what it means. Like what impact does a positive absorption rate have on the market or why might a $22/sf Triple Net (NNN) lease be over my budget when a $24/sf Full service lease is within my budget? What is a Triple Net (NNN) lease anyway?
As a result I have decided to list here some, (not all) of the most commonly used terms in Commercial Real Estate:

  • Absorption Rate – the amount of units inventory of a commercial property type that become occupied during a specific time (usually a year).
  • Air Rights – The rights to use  the air space over a piece of property.
  • Americans with Disabilities Act (ADA) – A civil rights law that was passed to prohibit discrimination against persons with disabilities.
  • Anchor Tenant – A tenant of a shopping center, building or industrial development that has leased a large space sometimes called a “destination” tenant, usually these tenants lease at least 25,000 SF. An example in a neighborhood shopping center anchor tenant may be a grocery store.
  • Base Rent – The minimum rent due the landlord. Typically a fixed amount, Escalations are calculated from the annual base rate.
  • Building Code – Local, state or regional ordinances that specifies the method and materials to be used in constructing improvements.
  • Capitalization Rate (CAP Rate) – The rate of return investors are receiving on similar investments.
  • Class A – A classification used to describe commercial buildings that are considered as extremely desirable investment-grade properties and command the highest rents and sales prices compared to other commercial buildings in the same market. These buildings contain a modern mechanical system, and have above average maintenance and management as well as the best quality materials and workmanship in their trim and interior fittings.
  • Class B – A Classification used to describe commercial buildings that qualify as a more speculative investment, ans as such command lower rents or sale prices compared to class A commercial properties. These commercial buildings typically have average to good maintenance, management and tenants. They lack prestige and must depend chiefly on a lower price to attract tenants and investors.
  • Class C – A classification used to describe commercial buildings that generally qualify as no-frills, older commercial buildings that offer basicd space and command lower rents and sale prices compared to other commercial buildings in the same market. These commercial buildings typically have below-average maintenance and management, and could have mixed or low tenant prestige, inferior elevators, and or mechanical/electrical systems. These commercial buildings lack prestige and must depend chiefly on a lower price to attract tenants and investors.
  • Common Area Maintenance (CAM) – An expense that can include a variety of property expenses. Typically expenses such as utilities, maintenance, parking lot cleaning, management fee and landscaping expense.
  • Community Shopping Center – A shopping center that has a trade area of usually between 5 miles up to 20 miles, depending on the other competition. These centers typically have a total square footage between 100,000 and 350,000 SF and will generally have 2-3 large anchored tenants. Common anchors are supermarkets and super drugstores and sometimes contain tenants such as apparel, home furnishings, toys, electronics or sporting goods.
  • Due Diligence – The process of investigating all the issues that effect the property such as zoning, soil tests, feasibility studies, tenant interests etc.
  • Estoppel Certificate – A ratification of the tenant’s lease by the tenant(s). Requested by the landlord when selling or refinancing the property to prove the validity of the lease.
  • Full Service Lease – A lease that usually provides full services such as janitorial and utilities, always confirm what expenses are included.
  • Gross Lease – A very broad term where the landlord paying the operating expenses read carefully to determine who is paying what expenses.
  • Letter of Intent ( LOI ) – Used in the early stages of negotiation, is a non-binding outline of the terms of the agreement to aid in the drafting of the agreement.
  • Load Factor – equals the rentable square footage/usable square footage minus 1.
  • Neighborhood Center – Provides for the sales of convenience goods( food, drugs etc..) and personal services for day-to-day living needs of the immediate neighborhood with a supermarket being the primary tenant.
  • Net Lease – Where some or all of the rent is “net” of expenses to the landlord. Carefully review.
  • Power Center – The center typically consists of several freestanding anchors and a minimal amount of small specialty tenants. A Power Center is dominated by several large anchors, including discount department stores, off-price stores, warehouse clubs etc.
  • Rentable square footage – the area the tenant is being charged rent on. In office buildings this often includes a load factor. A load factor is a markup over usable space to reflect the common areas of the building.
  • Strip Center – A strip center is an attached row of stores or service outlets managed as a coherent retail entity, with on-site parking usually in the front of the stores.
  • Triple Net Lease ( NNN) – A Type of lease where the tenant pays some of the expenses in addition to the rent. In many areas including the valley the NNN part refers to common area maintenance (CAM), real estate taxes and insurance. Always confirm.
  • Useable square footage – The actual physical space occupied by the tenant. Useable space increased by the load factor will equal the rentable square footage.

 

 

 

This information is for informational purpose and not intended to be investment advise, and should be explained to you in detail. You should always feel free to consult an attorney and/or tax adviser to obtain further information you deem necessary. I want you to be prepared.

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