The underlying principals of commercial real estate investment are pretty simple, you own a building, and tenants pay you rent to lease space from you.
But what goes into being successful from a management standpoint, can vary drastically from asset to asset.
On one side of the spectrum, you have an absolute triple net retail building leased to a single national retailer, or maybe a large single tenant industrial building leased to a Fortune 500 company. These types of assets are the closest thing you can find to a “coupon clipper” in the commercial real estate business.
Since the buildings are under an absolute NNN lease structure, the tenant is responsible for everything involved with the real estate. If there’s a roof leak or an electrical issue, the tenant takes care of it. If the dumpster is overflowing, it’s the tenant’s responsibility.
Many times, in absolute net situations, the tenant hires their own vendors and signs their own service contracts.
Additionally, if the building is leased to a major corporation, the rent usually gets paid in a very timely manner. And since there is only one tenant, there is even less management intensity.
These assets are easy to run remotely and are the “municipal bonds” of the commercial real estate business.
On the complete other side of the spectrum, lies the multi-hundred unit garden apartment building.
Not only do you have, say 300 tenants to deal with, you’re now dealing with peoples homes. You have tenants in your space outside of normal business hours.
An asset like this is incredibly management intensive. You’ll need boots on the ground, an entire on site staff. You’ll need a maintenance team, a property manager, a leasing and marketing team to be sure all vacancies are being properly shown and filled. You’ll probably need a full time bookkeeper as well just to handle all of the financial transactions for the asset.
And with all of the staff, comes the intricacies of managing a staff and giving them direction and leadership. It goes without saying, that a “C” garden apartment building is also going to be intensive than an “A” building.
So that’s what the spectrum looks like. All other types of assets fall somewhere in between. Here are a few other factors that contribute to an assets management intensity:
- Amount of Tenants
- Lease Structure
- Amount of Financial Transactions
- Age of The Building
- Commercial or Residential
- Common Areas
- Vacancy Downtime Factor
Just because a building is more management intensive, certainly does not make it a bad thing. In fact, having a very effective asset and property management system for highly intensive hands-on properties can be a huge competitive advantage for an operator.
In closing, managing commercial real estate runs the gamut from “clipping a coupon” each month, to requiring the full time efforts of an entire staff of people. Whatever your strategy or style of investing is, it is important that you have a game plan and the necessary resources to be successful with each asset.