Commercial real estate investment is considered a purely local business. This means the property’s market location plays a significant role in its success in the investment field.
So, you must find the best markets to grab the best deals. However, it can be tedious for a novice investor to crack the deal. In such cases, you need an expert who knows local market conditions and can help you proceed.
Such experts are known as commercial real estate brokers. This article will help you know a commercial real estate broker’s importance, function, and benefits. Read on to satiate your knowledge of CRE brokers!
Define Commercial Real Estate Broker
Commercial real estate brokers can be members of CRE brokerage firms, independent agents, or employers of CRE agents. They work as intermediaries between commercial real estate buyers and sellers. When hired by a client, these brokers help them sell, purchase or lease commercial real estate.
Considering the working principle, you may need clarification on CRE brokers and agents. However, the difference is that CRE brokers can work independently, but agents cannot. Besides, CRE agents are hired by CRE brokers.
Define Commercial Real Estate
When a property is only utilized to conduct business, it is categorized as commercial real estate or CRE. Typically, an investor owns commercial real estate and receives rent payments from each tenant.
Office space, strip malls, lodging facilities, quick-service restaurants, and hotels are a few examples of CRE. However, commercial real estate can occasionally be owned and operated by the business that occupies the space.
Types of Commercial Real Estate Brokers
Commercial real estate brokers can be of three types, buy-side, sell-side, and leasing brokers.
Individual investors or companies who want to purchase real estate can hire buy-side brokers. For instance, huge corporations like KFC have their in-house real estate department, which consists of licensed brokers. These brokers help in finding and buying new spaces for KFC’s restaurants.
Moreover, buy-side brokers can be employed by brokerage firms or self-employed. Investors looking to purchase new properties can contract with these brokers to fetch new properties for them.
An owner-to-market often hires a sell-side broker to sell a property. They are also known as listing brokers. Large corporation houses also hire sell-side brokers in their real estate departments. Moreover, these brokers are also hired by individual clients or brokerage firms.
Sell-side brokers work hard to market the properties that are to be sold. These marketing strategies include preparing the landscapes by cleaning them up, arranging professional pictures of the property, and preparing Memos to attract potential buyers.
The buy-side and sell-side brokers need to work together to continue client transactions. Sometimes, both these brokers can be the same person.
How does a Commercial Real Estate Broker Function?
The main function of a broker is to help their clients with the best deal. Here are some of the ways a commercial real estate broker works:
CRE investors on the ‘buy side’ often hire an individual buy-side broker or brokerage firm to find their purchasable commercial properties.
Initially, the broker and investor discuss the desired property type. Then, after knowing an investor’s preferences, brokers will employ market knowledge to find the best deals for that investor.
Brokers may take two or more weeks or months to find the right property for the investors. After identification, brokers negotiate a contract with the investors and manage all the logistics involved in closing processes or diligence. The broker’s acquisition duties are over once the investor purchase the chosen property.
Property owners hire a suitable commercial real estate broker per their needs after taking proposals from multiple brokers. These brokers represent the property owners in selling their existing properties. After placing a listing agreement, they create Offering Memo and market the property within their contacts and investor networks.
A buyer accepting the proposal will negotiate with the sell-side brokers representing the property owner and managing closing logistics.
- Commercial Leasing
Apart from helping buy and sell, landlords or tenants may hire commercial real estate brokers to represent leasing transactions. Landlords hire brokers to help them find a tenant for their property or space. These brokers represent the landlord and negotiate the lease terms and conditions with tenants.
In the same way, a tenant can also hire commercial real estate brokers to find a new space per their requirements. Brokers will find a landlord, negotiate the terms of the tenant and try to fix the deal at the best possible price.
- Financial Analysis
Financial analysis is a crucial feature of an efficient commercial real estate broker. One of the essential duties of a broker in a purchase or sell transaction is to compile an Offering Memo.
This marketing document summarizes all of the property’s key features and the surrounding real estate market. Among the Offering Memo’s most crucial components is an operating proforma, which describes the expected revenue and expenditures for the property. These figures serve as the foundation for many purchase decisions.
Benefits of Hiring a CRE Broker
Investors and property owners can save time and money by hiring commercial real estate brokers. When carrying out their functions efficiently, commercial real estate brokers can be advantageous in the following ways:
- Building a wide network
Commercial brokers often build a vast network in their target community. It helps them create a link with the vital community members so that they can get first mover’s benefits during a deal.
- Understanding tax and zoning laws
In most cases, individual investors need to understand the complex rules, regulations, and taxation involved while purchasing commercial properties. These regulations vary depending on the states, zones, and industries. So, individuals hire commercial brokers who have expertise in taxation and zoning laws. They help clients to complete the formalities and proceed with CRE investment.
- Business plan evaluation
Commercial real estate brokers help determine their client’s capability by evaluating their business. For example, they go through statistical analysis to assess the safety margin of their client’s investment in properties.
- Negotiating with the client or on his behalf
As already mentioned, these brokers are intermediaries between buyers and sellers, so they need to be experts in negotiating. CRE involves multiple parties with conflicting incentive approaches. Commercial real estate brokers help crack the best deals for their clients with excellent communication skills and understanding.
- Conducting research
A commercial real estate broker needs to be resourceful about market conditions. So, they should conduct detailed research on the market to assess favorable properties for buyers. In addition, brokers should remain aligned with the local demographics, property maintenance costs, business insights, environmental qualities, and the client’s desirability regarding the property’s location.
- Analyzing lease payments
Commercial real estate brokers also analyze the lease payment trends by conducting thorough research on the CRE he operates. Check out the four main types of CRE leases below:
- Gross lease: landlord pays the maintenance, property tax, and insurance in this lease. However, the tenants only pay rent for the commercial space.
- Triple-net (NNN) lease: tenant pays the maintenance, property tax, and insurance under this lease
- Double-net (NN) lease: Tenants only pay the insurance and property tax under this lease
- Single net lease: Only property tax is paid by the tenant under this lease
Longer leases are secured for the landlords, given the assurance of rental incomes. However, under shorter lease terms, rents can be managed flexibly.
How to seek a Commercial Real Estate Broker?
Any business or investor must carefully consider the consequences of choosing a commercial real estate broker. The most typical methods for finding one include online searches, networking with other real estate experts, or getting a referral from a reliable co-worker.
Once a number of applicants have been found, they should undergo additional screening to determine how long they have had their real estate license and how much experience they have with particular property types. For instance, a broker representing office space might not be the best choice to sell retail space.
Following the selection of a broker, some legal documentation, such as a listing agreement, is completed outlining the conditions of the collaboration. It might specify, for instance, how long the exclusivity period will last, the broker’s fee, or the tasks the broker will carry out on the client’s behalf.
The commercial real estate broker’s job description is to carry out the conditions of the legal papers after the paperwork has been completed.
Thus, with all these market understandings and in-depth knowledge of CRE, commercial real estate brokering can be lucrative for Many.
However, the expertise is only achievable in a few days. Brokers need excellent research capability, financial analysis, and knowledge to fetch the best property for their clients.