NEVADA BUSINESS MAGAZINE:How to Lease or Buy: A Guide to the Rebounding Commercial RE Industry

Buying or leasing commercial real estate is a stressful and complex process that can be difficult for even the best of brokers in Nevada. What about for entrepreneurs or business executives whose areas of expertise may be in gaming or healthcare? How should they evaluate the pros and cons of buying or leasing, choosing a location and making a purchase?

Taber Thill, senior vice president at Colliers International in Las Vegas, said it’s important for executives to ask brokers questions about their experience, or what area of commercial real estate they specialize in and if they are able to find you the property a company needs. As for the entrepreneurs and executives, Thill advised having an idea of what type of commercial property needed, and be willing to adjust expectations to maximize the investment.

Commercial real estate includes a number of property types. According to the National Association of Realtors, multifamily residential, office, industrial or retail properties that can be bought or sold in a real estate market are all considered commercial real estate.

So should a Las Vegas or Reno business owner buy? “I think it all depends on what their requirements are for space,” said Sheila Colfer, president of CCIM, or Certified Commercial Investment Member, Northern Nevada.

Colfer said it’s also about getting greater control over the costs of real estate, as opposed to leasing where market conditions could lead to higher rental costs. Another benefit to buying is tax purposes and asset appreciation. Both Colfer and Thill said there was no one-size-fits-all strategy for buying or leasing commercial real estate. It depends on the needs of each business. With that in mind, when deciding to buy or lease it’s important to understand the market.

Market Conditions

After several years of recession followed by years of modest, but uneven, economic recovery statewide, Nevada’s commercial real estate market finally seems to be back in business. That growth is being led by strong numbers in taxable sales and employment. Occupancy in commercial real estate is rising, led by industrial but with credible increases in office and retail.

Due to an upswing in the market, investors and tenants are willing to buy and lease. In fact brokers completed a number of sizeable deals last year, including the VFM Manufacturing Facility in the Southwest part of Clark County for $10.5 million in November.

Overall, investment sales in Southern Nevada totaled $204.2 million last year, with just over 2.3 million square feet sold for an average price per square-foot of $88.55. The average sale size was 59,000 square feet in Southern Nevada.

Leasing rates for industrial, office, retail and medical continue to gather momentum. “But supply is a little concerning, especially when it comes to big box retail and distribution space,” said Jarrad Katz, a senior vice president and principal with MDL Group in Las Vegas. “Lease rates have not reached a value that would justify the construction of more large industrial properties in Southern Nevada.”

According to Colliers, the average industrial lease rate in Southern Nevada was 64 cents per square foot.

“We are about a year or so away from running out of 5,000 to 18,000-square-foot space,” Katz said. “There’s not much of that space being built, because it’s more expensive to build with more bathrooms and office space.”

He also attributed the slowdown in industrial construction to “comps at break even and [spiking] prices for land” in Southern Nevada.

“I don’t see land prices going down,” Katz said. “Along the (southern) beltway, that land was trading at $1 million an acre in 2006 and 2007. When the recession hit, the zone was changed to residential to get top dollar.”

In Northern Nevada, both demand for office and industrial space continues to be very strong as leasing activity continues to increase in all the major submarkets as well as investors returning to the market. Publicity and awareness of the Reno industrial market is at an all-time high. Interest from manufacturers, distributors, and investors remains strong.

Similar to the industrial market in Southern Nevada, product under 100,000 square feet is very tight. According to Colliers in Reno, available Class A under 100,000 square feet, “is almost nonexistent.”

“I think everybody had a good year in 2015, and continues to have a good year early on in 2016,” said Colfer. “It started with Tesla, and continued with Switch and other companies moving into the region.”

Colfer, who is also a broker with Dickson Commercial Group in Reno, credited the attractive commercial real estate market to the Economic Development Authority of Western Nevada (EDAWN) and their efforts at attracting businesses to Northern Nevada.

“Our market has tightened up,” Colfer said. “Company executives looking to buy or lease should make sure they give themselves enough time. They need to start earlier than they think when it comes to looking for space.”

In terms of office space in Southern Nevada, Thill said it all depends on location. He said those areas where “demand is very high” include the 215 Beltway, the Southwest and in The Hughes Center, a well establish 1.4 million square feet of Class A space. Thill said most businesses are looking at those areas, while the older areas of the region are suffering from outdated product.

“A lot of these buildings were built in the 1980s and are single story for a single tenant,” Thill said. “The average single tenant size in the 1980s averages 2,000 to 2,500 square feet. Today that’s up to between 7,000 and 8,000 square feet.”

Thill stressed that potential buyers and tenants should ask their broker about the market conditions, and whether their firm has research to help choose where the best opportunities are to buy or lease commercial real estate.

Questions to Ask a Commercial Broker

Choosing a broker to help find commercial space for a business or negotiate a lease can be a daunting task. Thill said any executive or entrepreneur should make sure that a broker’s experience, capacity, motivation and specialization will work for them. He said before choosing a commercial real estate broker collect information by asking the broker specific questions about how they’ll handle each client.

What is the broker’s specialization?

Does the broker focus specifically on the area where their client’s building is located and their building type and class? Does the broker specialize in representing owners?

What is the broker’s experience?

The broker should provide information on his or her track record of dealing with similar leasing challenges, similar building types and buildings in the same area. When provided with a case study, a potential client should press the broker to better understand the context of their success in terms of original expectations or the market constraints on the outcome.

What is the broker’s motivation?

Will the client’s goals for the property be aligned with the broker’s goals? For example, Thill said hiring a broker who is not specialized in property types needed, whether industrial or office or others, might mean the broker spends less time studying new submarkets and specific challenges in-depth.

What’s the broker’s capacity?

Some brokers who claim to dominate the market have taken on so many clients that each client’s property will not be their top priority (or even close). These brokers may speak only in general terms to what they’ll do. To ensure a broker will devote substantial time to the project, potential buyers and sellers should ask to see the broker’s detailed marketing strategy and action plan.

What are the broker’s resources?

Many boutique and local commercial real estate firms have very limited platforms, with little research, marketing and administrative support. This means a broker is responsible to deliver all or most of it alone, which can result in a slimmer service offering to clients.

One aspect that shouldn’t be overlooked are brokers that are members of a professional organization. Certified Commercial Investment Members (CCIM) and the Society of Industrial and Office Realtors (SIOR) are two organizations that offer members support through education and a network of professional resources. Both organizations require extensive education and experience to obtain certification.

Thill added that it’s alright to ask if a broker’s service is guaranteed. No one can guarantee an outcome based on the marketplace in Nevada, but brokers and their support teams should be committed to keeping their promises. That means offering a specific action plan. Define, from the beginning, expectations for service, reporting and accountability.

Katz, who specializes in industrial properties, said that potential buyers or tenants should ask about a building’s power usage, turning radius for trucks, even how close the property is to the freeway. He urged people to ask about lease rates and amenities when looking at commercial buildings, whether industrial or retail.

Licensing Requirements and Broker Fees

So is there a difference between a realtor, a broker and real estate agent? Yes, but it can be confusing for the layperson. In Nevada, a real estate agent, typically known as a real estate salesperson, is a person who has completed 90 hours of real estate education, of which 18 hours are devoted to Nevada real estate law. They do not have to attend any particular school, but they must pass the licensing exam, according to the state of Nevada’s Real Estate Division.

A broker, on the other hand, is someone who has received 64 credit hours of school training of which 27 hours are devoted to Nevada real estate law, and must pass a more stringent exam before being licensed.

In Nevada, real estate agents obtain a license from the Real Estate Division. The costs are as follows: $299 for required Nevada education, $100 for state examination, $210 for salesperson’s license or $250 for broker’s license for the first two years, between $37.50 and $80 for fingerprinting. The costs varies for advertising and office fees.

Meanwhile, brokerage fees can be a little confusing, especially if it is the first time a company is entering into the purchase or lease of a commercial property. Brokerage fees are negotiable and may be different from company to company or even agent to agent.

“Typically, on a lease transaction the fee for representing the tenant or the end-users is between 4 and 5 percent,” Thill said. “On sales, it depends on if the building is full or vacant or if it’s owner-occupied.”

Thill, who is also president of the Society of Industrial and Office Realtors (SIOR), in Las Vegas, said fees related to sales are based on the value of a property. For example, a building sold for $5 million or less, a broker would charge 3 percent, between $10 million and $20 million, 5 percent and over $20 million, it’s 1 percent to 2 percent.

“The amount of work is the same whether you are selling a $5 million or $30 million building,” Thill said. “Compensation may be geared toward the purchase price.”

It’s clear that buying or selling a property is a tricky venture with many variables at play. Understanding the market going in is vital to any executive’s success, and hiring a knowledgable professional can be key.

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