An Overview of Commercial Real Estate Development

​Commercial real estate development involves building retail centers, industrial facilities, office buildings, and other commercial investments or adjusting existing ones to meet market needs. Developers help property owners boost the value of their property by ensuring it remains attractive to the evolving needs of target users.

Companies, banks, institutions, and other for-profit organizations that prefer long contracts usually rent commercial property. The return on investment (ROI) for commercial real estate is typically higher than for residential property. Most commercial space renters run profit-generating operations, meaning they can afford to pay higher rent.

Commercial real estate development requires significantly higher capital investments than residential property development. Commercial property financing is also more expensive than residential property loans.

The first step in commercial real estate development is predevelopment, involving a thorough project analysis. Developers conduct market and feasibility studies to understand the needs of the target market, the proposed development, and opportunities for exploitation. Developers also help clients identify, acquire, and vet properties. Before suggesting a property, developers consider the traffic around the site, the topography, and the accessibility. They review the infrastructure available, the demand for commercial property, and the zoning and land use guidelines. These factors indicate the suitability of the project and how it will perform.

Moreover, in the predevelopment phase, property developers oversee environmental impact assessments, site plans, and building plans. They also discuss and arrange financing and apply for permits. The relevant authorities evaluate building plans to ensure the project's safety and compliance with the building codes.

The next phase is construction, which includes monitoring the progress to mitigate budget and time overruns and assessing the standard of work to avert compliance issues and other interruptions. As the property nears completion, developers assess safety, devise marketing plans, discuss pre-lease agreements, and identify property managers. The project receives a certificate of occupancy after meeting safety standards.

The last step in real estate development is operation, in which developers and owners lease or put the property up for sale. Developers sometimes help owners find lessees for their properties and build a reliable source of income. Having several tenants under pre-lease agreements during the construction phase helps ensure the project will cover its operational costs early on.

Those interested in commercial real estate development can choose between direct investments or investing in real estate investment trusts (REITs). Direct investment requires significant capital and in-depth industry knowledge. These owners can enjoy a high return on investment (ROI) and retain control over the asset. However, the owners assume responsibilities, such as property maintenance, managing tenants, and complying with legal and regulatory requirements.

REITs, on the other hand, offer a hands-free approach to commercial real estate development. A trusted third-party sets up the trust and pools resources from various interested parties. The finances are used in purchasing and developing the property, and in return, the owners receive dividends after tenants rent spaces. The company setting up the trust retains the responsibilities of advertising vacancies, interviewing tenants, overseeing maintenance, and meeting legal and regulatory requirements.

REITs are required by law and IRS regulations to pay out at least 90 percent of their profits to the shareholders, meaning investors can enjoy a reliable source of income. Shareholders can also invest in multiple REITs to diversify their portfolios. Notably, these investment vehicles are highly liquid since they are publicly traded on the stock market. This means that owners can sell their investments easily and at any time. Those who retain ownership long term have the potential to enjoy capital appreciation as well as profits earned from leasing operations.

Zi Qian Zhang, Real Estate

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