Commercial real estate (CRE) has its own set of terms that can feel like another language, especially if you’re new to the industry—or even if you’ve been around for a while. From “cap rates” to “LOIs,” understanding the basics can make a big difference in meetings, negotiations, and decision-making. Here’s a straightforward guide to seven commonly used terms:
- Absorption
- This refers to how much space in a market is leased or sold over a given period. Positive absorption means more space is being filled; negative absorption means vacancies are increasing.
- Why it matters: Absorption rates show market activity and help investors and brokers assess supply and demand trends.
- Anchor Tenant
- A major tenant that draws traffic and increases the value of surrounding spaces—like a big-box store in a shopping center or a tech giant in an office complex.
- Why it matters: Having an anchor tenant can make a property more attractive to smaller tenants and boost overall occupancy and revenue.
- Build-to-Suit
- Instead of leasing existing space, the landlord constructs a property specifically for the tenant’s needs. The tenant then pays a lease that covers the cost of construction over time.
- Why it matters: Build-to-suit projects simplify the process for tenants and often lead to long-term leases for landlords.
- Cap Rate (Capitalization Rate)
- Think of this as the property’s “interest rate” for investors. It’s a measure of the potential return on an investment property based on its income. For example, if a property costs $1 million and produces $100,000 a year in net income, the cap rate is 10%. Lower cap rates often mean less risk; higher rates usually signal more potential reward but more risk.
- Why it matters: Cap rates help investors compare opportunities and gauge risk versus reward in different markets.
- Core vs. Value-Add Investments
- Core: Stable, high-quality properties with reliable tenants—safer but typically lower returns.
- Value-Add: Properties that need improvements or re-leasing—higher risk but potential for greater returns.
- Why it matters: These terms help investors decide how much risk they want to take and what type of returns to expect.
- Letter of Intent (LOI)
- A LOI lays out the basic terms of a deal before the formal lease or purchase agreement. It’s non-binding but sets expectations on square footage, lease rate, TI allowances, start dates, and more.
- Why it matters: LOIs save time by clarifying deal points early and avoiding surprises during negotiations.
- Triple Net Lease (NNN)
- A Triple Net Lease means the tenant pays rent plus property taxes, insurance, and maintenance costs. It’s common for office, retail, and industrial properties.
- Why it matters: Tenants know their financial obligations clearly, while landlords are protected from unexpected increases in operating expenses.
Pro Tip: Everyone in CRE starts somewhere. Don’t hesitate to ask questions or lean on your advisors—knowing the language makes you more confident, more effective, and more involved in the deal.
Have a CRE term that still confuses you? Reach out to Vista Commercial Advisors—we break it down in plain language, no jargon required.
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