Fort Collins Commercial Real Estate

Commercial Real Estate is a lot like residential. Owners occupy the building but use it for commercial purposes. They tend to not sleep over!

Right here in Fort Collins, there are a wide variety in commercial real estate properties. They run the gamut! They can range from small mom-and-pop buildings to large retail and warehouse units owned or leased by national tenants. Every city like Fort Collins tends to have an industrial park and widespread office parks. There are the commercial districts with retail and class A offices, strip retail, and secondary class B and class C offices. There is a commercial property for every taste in this city!

Commercial real estate does tend to follow the residential market. The stronger the residential market, i.e. the more rooftops in the area, the stronger the commercial market. Vitality is vitality, everywhere you turn.

Commercial real estate is a bit of a different beast though in many ways, especially when it comes to leasing. The process can be more secure, and more long-term than residential. Typically, residential rental properties are leased one year at a time. Tenants tend to turn over, moving in and moving out, more often.

Commercial is about the numbers – and they can be surprising.

The right commercial real estate investment can behave quite differently. Leases are more long-term. Some leases extend 20 years and more. The tenants are qualified, but commonly the lease is backed by a personal guarantee or a larger company or corporation. The longer-term leases have automatic rent escalators built in. On an annual basis, the lease will increase based upon a set percentage, such as 3%, or the annual increase in the consumer price index (CPI) for example.

When it comes to commercial real estate in Fort Collins, it’s really all about the numbers. Lenders tend to require more down payment on commercial properties, typically 20%. If it is a speculation property being built, lenders require that 50% of the building be pre-leased in most cases.
The analysis of a commercial property to determine its worth is also done differently. There is always the sales comparison approach where recently sold comparable properties are analyzed to get an indication of value. This is done on a square footage basis although in warehouse properties it can be on the cubic foot basis.

In commercial real estate the primary analysis is based upon projected income. Commercial real estate investors tend to use a capitalization approach to value. This is commonly known as a CAP rate. Comparable sold properties are analyzed on a cash basis, i.e. their net annual income assuming they are owned outright, and there is no mortgage.

The annual net income is divided by the sales price to get the CAP rate. For example, if a property sells for $1M and has a Net Annual Operating Income (NOI) of $100,000, then the CAP rate is .10 ($100,000/$1M=.10) This is not an interest rate. This is a measurement of the return of capital, not the return on capital.

If an investor pays $1M for a property that has a CAP rate of .10 then the investor receives all the original investment back in 10 years. The sooner the better! Then an investor can take the CAP rate from comparable properties and apply it to the net income of the property they are considering, seeing if it is priced reasonably. It is also a great way for an owner to analyze their own property to see if it is rented at market rents.

There is so much more to analyzing commercial real estate in Fort Collins, but the take away is: commercial real estate can have as good a bottom line as residential real estate. The long-term appreciation can be just as good as residential, cash flow can be better, and longer-term tenants mean less turnover cost. Commercial real estate can be a very good investment, especially in entrepreneurial Fort Collins!