CCIM Intro Course, Study Guide: Module 1

INTRODUCTION TO COMMERCIAL INVESTMENT REAL ESTATE ANALYSIS

Study Guide for Module 1:

Commercial Real Estate
Learning Objectives .................................................................................................................. 1
Commercial Property Types ....................................................................................................... 2
Types of Office Properties ......................................................................................................... 2
Classification of Office Properties ............................................................................................... 2
Industrial Properties .................................................................................................................. 2
Retail Properties....................................................................................................................... 4
Overview of User and Investor Activities ...................................................................................... 5
Types of Real Estate Markets: Space Market ................................................................................ 6
Scope of Services: Tenant Representation .................................................................................... 6
Scope of Services: Brokerage .................................................................................................... 7
Scope of Services: Follow-Up Services........................................................................................ 8

Learning Objectives
List the characteristics of each commercial real estate type: office, industrial,
retail, and multifamily
Identify data and resources that would enhance decision-making for each
property type
Distinguish between the concerns of user clients and investor clients
List services that can be offered to the commercial real estate client

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CCIM Intro Course, Study Guide: Module 1

Commercial Property Types

The four primary types of commercial properties are:

Office
Industrial
Retail
Multifamily

Types of Office Properties

Low-rise: Fewer than seven stories above ground level
Mid-rise: Between seven and 25 stories above ground level
High-rise: More than 25 stories above ground level
Classification of Office Properties
Office properties may be classified as

Class A
Class B
Class C

Class A properties are the most functionally modern. Properties classed B and C in
the same market typically command lower rents because they are older and have
experienced some degree of obsolescence. They may not be as efficient or desirable
as class A properties because their design or condition causes functional or layout
problems.
Industrial Properties
Industrial properties house production, manufacturing, high-tech, distribution, or
warehousing operations. These properties also may include some office space or
storage space. Like office buildings, some industrial buildings are located in parks
and can be classified as single-tenant or multi-tenant buildings. By broad physical
and functional characteristics, industrial space falls into the following categories.
Bulk
These properties represent the simplest of all industrial space because they
may consist of little more than four walls, a roof, and a floor. Bulk properties
can be very large, averaging 50,000 square feet (sf). Sometimes bulk
properties are measured in cubic feet because height can be critical to some
industrial tenants.
Typically, bulk properties have little office space. They may have elaborate
flooring and paving around the building. Aprons leading up to the warehouse
are made of concrete to withstand the weight of rail and truck traffic.
Loading docks may be at truck level (dock high) or have load levelers to
adjust to truck bed heights.
Office/Warehouse
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CCIM Intro Course, Study Guide: Module 1

This category of industrial space may devote 5 to 25 percent of its space to

office requirements and typically is constructed of metal, brick, block, or
wood. This category typically features dock-high loading and is located near
or within city limits. Good highway access is an important consideration for
office/warehouse properties.
Office/Service
These properties tend to be more expensive buildings located in attractive,
park-like settings with landscaping. They are usually at the highest end of
market rents and devote more than 25 percent of their space to offices.
Office/service properties are similar to research and development facilities.
They typically are located along major arteries.
Research and Development
This category is a hybrid of office and manufacturing. The research and
development category is the most people-intensive of industrial properties.
Tenants of these properties usually require many improvements, such as
clean rooms for chip manufacturing, laboratories, cafeterias, lounges, and
other amenities. Research and development properties have rental and sale
values second only to pure office space among commercial properties. They
often are located near universities and a white-collar labor base.
Freestanding
This category often is developed in an industrial park setting or done as a
build-to-suit on a selected piece of property. Freestanding properties usually
are designed for manufacturing, distribution, assembly, packaging, and
similar uses. These properties vary in their construction type, design, ceiling
height, utility services, amount of land, and usually are designed, built and
occupied by an owner/user for a special purpose.
Multi-tenant
This type of industrial property attracts the smallest user of industrial space
(1,000 to 5,000 sf). It is often situated in a complex of similar buildings,
where necessary support services are located in or near the complex. Multitenant properties might contain incubator space for start-up high tech,
warehousing, or distribution tenants renting on a short-term basis. Buildings
for such tenants usually require 18-foot or higher ceilings, efficient truckloading arrangements, and space for offices.
Large Manufacturing
These facilities are used for manufacturing, production, assembly, shipping
and receiving, or major production processes. Size is based on the users
requirements. These properties often are radically modified to suit a
particular product or process, and therefore are prone to functional
obsolescence.
Industrial Parks
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CCIM Intro Course, Study Guide: Module 1

This is a planned development often controlled and administered by one

person or an investment entity such as a real estate investment trust (REIT).
The types and character of uses are controlled to protect and preserve
compatibility. Industrial parks can serve mixed-use, single-use, special
scientific and technological uses, or sophisticated communications uses.
Retail Properties
Retail properties are used exclusively to market and sell goods and services to a vast
variety of consumers. The configuration of these properties is designed to meet a
particular consumers buying preferences. Retail properties fall into general
categories such as commercial strip properties, neighborhood shopping centers and
community centers.
Commercial Strip Properties
These are strips of commercially zoned land divided into parcels to be
developed for retail use. They usually have a fairly narrow trade area and
offer a variety of services.
Neighborhood Center
This center is designed to provide convenience shopping for the day-to-day
needs of consumers in the immediate neighborhood. A supermarket anchors
half of these centers, while about a third have a drugstore anchor. A
neighborhood center usually is configured as an L or straight-line strip with
no enclosed walkway or mall area, although a canopy may cover and connect
the storefronts.
Community Center
A community center typically offers a wider range of apparel and other soft
goods than a neighborhood center. Among the more common anchors are
supermarkets, super drugstores, and discount department stores.
Community center tenants sell items such as apparel, home-improvement
goods, furniture, toys, electronics, or sporting goods.
Freestanding Store
This is a commercial establishment providing goods and services in single- or
multiple-use buildings of various sizes. The larger, newer freestanding stores
also are referred to as big boxes.
Freestanding retail development often is created on an infill basis to fill
specific market gaps or local needs and may be found near major shopping
centers and along major corridors.
Regional Center
This center type provides general merchandise, a large percentage of which is
apparel, and services in full depth and variety. Its main attractions are its
anchors: traditional, mass market, discount department stores, or fashion
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CCIM Intro Course, Study Guide: Module 1

specialty stores. A typical regional center usually is enclosed with an inward

orientation of the stores connected by a common walkway with parking at the
perimeter.
Super-regional Center
Similar to a regional center, but larger in size, a super-regional center has
more anchors, a deeper selection of merchandise, and draws from a larger
population base. As with regional centers, the typical configuration is as an
enclosed mall, frequently with multiple levels.
Power Center
This type of center is dominated by large retailers, including discount
department stores, off-price stores, and warehouse clubs, or category
killers.
Fashion/Specialty Center
This type of center is composed mainly of upscale apparel shops, boutiques,
and craft shops carrying selected fashion or unique merchandise of high
quality and price. These centers need not be anchored, although sometimes
restaurants or entertainment can provide an alternative to high-profile
anchors. The physical design of the center is sophisticated, emphasizing a
rich dcor and high-quality landscaping. These centers usually are found in
trade areas with high income levels.
Theme/Festival Center
These centers typically employ a unifying theme that is carried out by the
individual shops in their architectural design and, to an extent, in their
merchandise. Tourists are the biggest market for these centers: restaurants
and entertainment facilities can anchor them. These centers, generally
located in urban areas, tend to be adapted from older, sometimes historic,
buildings and can be part of mixed-use projects.
Outlet Center
Usually located in rural or occasionally in tourist locations, outlet centers
consist mostly of manufacturers outlet stores selling their brands at a
discount. These centers typically are not anchored.
Overview of User and Investor Activities
There are many ways that commercial real estate can be profitable for commercial
investment practitioners. A variety of tasks and services can be offered to both user
and investor clients.
Users
One of the first steps to understanding the user side of the business is to
learn as much as possible about a specific product and the types of clients

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CCIM Intro Course, Study Guide: Module 1

who use it. This is a never-ending process, as technology, construction

techniques, and client applications always are changing.
Investors
The individuals or companies acquiring property as a commodity to be
converted into wealth are investors. Generally, investment properties
currently are occupied by tenants and have the potential for producing a
positive income stream.
It is not enough to have a thorough understanding of the fundamentals and
characteristics of real estate investmentsan understanding of the
motivations and risk tolerance of investors also is needed. Users and
investors do not function in a vacuum.
Types of Real Estate Markets: Space Market
Space Market
The space market represents the physical space that exists within the
marketplace. The availability of space is determined primarily by supply and
demand. Fluctuations in population growth, transportation, land-use controls,
employment, location, use, and numerous other factors influence what is
available and where. Therefore, these changes will impact supply and
demand. For example, as demand increases and supply or availability
decreases, rental rates and property values increase.
Because of the constant change in supply and demand factors, an element of
risk is associated with the space market. If these fluctuations could be
predicted with certainty, property cash-flow streams and rental rates would
be stable and risk free. Instead, investors and users must attempt to predict
the future by evaluating all the factors influencing the space market to try to
forecast availability, absorption, and future demand.
Therefore, it is important to have an in-depth understanding of market
activities, trends, events, rates and prices, and transactions.
Scope of Services: Tenant Representation
Tenant representation focuses on the relocation process and the real estate
professionals role when representing the user. The tenant representative, as leasing
specialist, represents the user looking for space, not the developer or landlord.
The tenant representation process includes the following tasks.
Step
Step
Step
Step
Step
Step

1:
2:
3:
4:
5:
6:

Needs Analysis
Market Research
Building Investigations
Requests for Proposals
Economic/Functional Analysis
Negotiations

Step 1: Needs Analysis

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CCIM Intro Course, Study Guide: Module 1

The initial step is to work closely with the tenant to define current and future
space needs accuratelyamount of space, kind of space, location, necessary
amenities, location with respect to competitors, trade area characteristics,
move date, and special needs. This involves studying the tenants current
space, probing goals and motivations for taking new space, and other factors.
The results of the analysis should be summarized in a letter of understanding
to the tenant for approval before proceeding to the next step. Also at this
stage, a project schedule is drawn up for the tenant, showing the time
allotted and the responsibilities assigned for each step.
Step 2: Market Research
The market is examined for available space that fits the users needs.
Possibilities are narrowed to a manageable number. The result of this stage is
a list of locations for the tenant to consider. Building data specific to each
property is presented to the tenant.
Step 3: Building Investigations
The result of this stage is a short list of the best spaces or sites for the
tenant. These spaces are screened and tours of the sites are arranged for the
tenant. The tenant compares the features of each with its needs.
Step 4: Requests for Proposals
In this step, letters are sent to the owners or owner representatives of the top
candidates specifying the tenants final requirements. The result is a proposal
to lease from the interested owners, spelling out the terms for which they
would consider in leasing to the tenant based on the tenants requirements.
This is the beginning of the negotiating process.
Step 5: Economic/Functional Analysis
Landlords proposals to lease are analyzed for a variety of economic factors,
such as rental rate, tenant improvements, moving allowances, parking, and
other concessions. Functional characteristics, such as floor location and size,
expansion options, and building amenities, are compared.
Step 6: Negotiations
When the deal is made, the tenant representative coordinates getting the
agreements into legal terms and helps expedite the process of preparing and
getting the lease signed.
Summary of Tenant Representation
A benefit of representing tenants in commercial real estate is that there is
assurance that the client has a specific need to be fulfilled within a certain
timeframe.
Scope of Services: Brokerage

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CCIM Intro Course, Study Guide: Module 1

Land Acquisition
Market rental rates as well as construction and financing costs must be
obtained prior to property acquisition to determine if the return on investment
is worthwhile. Information about comparable land sales, other available
parcels of land, and competing projects, either built or to be built, is key to
the analysis. A knowledgeable real estate professional also is able to advise
the client about tenant preferences specific to that particular market.
Leasing
A leasing specialist representing a property is responsible for bringing tenants
to that property. A leasing specialist will confirm that the lease rates are
compatible with the market, target the markets most likely to be suitable for
the property, and design and implement a marketing plan. Once the plan has
been implemented, the leasing agent is responsible for providing feedback to
the owner and for the follow-through necessary to close the transaction.
Whether the leasing specialist represents the building or the tenant, the
leasing specialists function is to find a fit between vacant space seeking a
user and a user seeking a location.
Selling
Opportunities exist to sell properties of all kinds. The same three basic
marketing steps apply that apply to leasing: establishing a value range,
targeting the market, and developing and executing a marketing plan. The
real estate professional will need in-depth knowledge of the market, market
trends, and local traditions.
Scope of Services: Follow-Up Services
It is important for the real estate professional to remain active after the deal closes.
Successful business relationships do not just happen at the eleventh hour. These
relationships require planning, effort, and continual contact with key decisionmakers, investors, and users, as well as contact with ancillary professionals such as
lenders, accountants, title companies, lawyers, appraisers, contractors, and
engineers. The broader the network, the easier it is to facilitate a successful
transaction.
Transactions are influenced, modified, and frequently destroyed by circumstances
and surprises that are not easily foreseeable. By establishing and maintaining a
broad network, the real estate professional is able to engage the services and
assistance of the appropriate problem-solver. For most commercial real estate
professionals, this ongoing process focuses on both the people and properties in the
market.
The effective real estate professional realizes that developing client relationships and
seeking repeat business means long-term success in the commercial real estate
business. The concept of adding value means providing service before, during, and
after the transaction.

Copyright 2002 CCIM Institute. All rights reserved.