Understanding the Commercial Real Estate Market

Commercial real estate plays a crucial role in the global economy, encompassing properties used for business activities such as offices, retail stores, warehouses, and industrial spaces. Understanding the market can be daunting for those that are unfamiliar, but with the following information, you can begin to navigate the industry with knowledge and confidence. 

To provide a quick overview before diving in, the commercial real estate market is composed of three major categories: office, industrial, and retail and each category serves different purposes and attracts different types of tenants. 

  • Office spaces are designed for businesses to conduct administrative activities and hold meetings with clients. 
  • Industrial spaces are used for manufacturing and storage purposes. 
  • Retail spaces are used for selling goods and services to customers. 

Now that the definitions are out of the way, let’s cover the basics of how the industry works.

How does the real estate market work?

One of the essential aspects of the commercial real estate market is demand and supply. The demand for commercial real estate is dependent on overall economic activity, such as job growth and consumer spending. In contrast, the supply is affected by construction activities, zoning regulations, and land availability. An imbalance between demand and supply can affect the market, causing rental rates and property values to increase or decrease. 

In the commercial real estate market, tenants lease properties from property owners or landlords. The terms of the lease agreement are typically negotiated by the tenant and landlord, with the rental rate being a critical aspect. Rental rates are influenced by various factors, such as location, amenities, and property size. Generally, rental rates are calculated on a per-square-foot basis, with higher rates for prime locations and better amenities.

The commercial real estate market is also affected by market cycles, which can be either expansionary or contractionary. 

  • An expansionary cycle means the economy is growing, resulting in job growth, increased consumer spending, and higher demand for commercial properties. 
  • A contractionary cycle occurs during a recession, resulting in job losses, decreased consumer spending, and lower demand for commercial properties. 

Understanding the market cycles is crucial for investors and businesses to make informed decisions about buying, selling, or leasing commercial properties.

Other factors to consider

1. Financing – Investors and businesses may need to obtain financing to purchase or develop commercial properties. Financing can be obtained from various sources, such as banks, private lenders, and commercial mortgage-backed securities (CMBS). The terms of the financing, including interest rates and loan terms, are determined by the lender and the borrower’s creditworthiness. 

2. Zoning – The commercial real estate market operates within the legal framework of zoning regulations and property laws. Zoning regulations determine how properties can be used within a specific geographic area. For example, a zoning regulation may prohibit industrial activities in a residential area. Property laws govern the ownership and use of commercial properties and the rights and responsibilities of tenants and landlords. Understanding the legal framework is essential for businesses and investors to avoid legal disputes and ensure compliance with regulations. 

By understanding these components, stakeholders can make informed decisions about buying, selling, or leasing commercial properties. Professional guidance can also help you navigate the real estate market and its complexities. If you are interested in working with industry-leading commercial real estate professionals and making deals happen, reach out to Plaza Companies!

Plaza Companies is the Premier Choice of Commercial Real Estate

Plaza Companies is a full-service real estate firm specializing in the leasing, management, construction, and development of some of the most innovative commercial real estate projects in Arizona.  Our firm specializes in staying connected and conscientious of all emerging trends in commercial real estate. Contact us today to learn more about leasing the right space or anything else we offer!

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