Commercial real estate and residential real estate share a lot of commonalities, making it hard to distinguish why finding an office is so much more difficult than finding a home. In residential, properties are typically considered whole, and as is. It is common to specify the amenities and the number of rooms for a residential dwelling because those items are fixed; whereas, in commercial real estate, the considered amount is typically far greater and space in a building is more fluid.
If commercial real estate were the same as residential, then that would mean that buildings contain suites that are ultimately leased out to tenants for a period of time. That space doesn’t change, only the tenants. Suites have a number, a square footage and physical attributes (like number of offices, drive in doors, cranes) that comprise the physical space that a tenant is taking up in a building. The way that people find that space is through an online vendor and/or real world tours of the physical space to determine if their company will fit in that physical space. The space is non conforming to the tenant and physical attributes are relatively stable.
The person representing a building might represent a number of suites that exist in that building because the landlord has authorized that broker or agent to represent all of the space within the building. Tenants may come and go, but the space stays relatively constant. The physical attributes that make up a suite become what brokers are leasing. That means that brokers sell structured pieces of real estate and can only negotiate on term and price. That is, for a lot of cases, true; however not all suites are representative of the space that they occupy, they are merely a representation of space that is determined by a landlord or a leasing agent.
In the above scenario, it marginalizes the work that is done on the brokers behalf. In commercial real estate, buildings are flexible in the way that a space can be represented. Suites are only beholden to the structural requirements of the building; therefore, any walls or offices that don’t contribute to the structure of the building become flexible. Due to the large size of most commercial lease transactions (hundreds of thousands, even millions of dollars) the space is open to many different customizations making the physical space of a suite fluid.
If suites become highly customizable, then the distinction of a suite as a physical constant becomes less and less true. Only the building is constant, with many chunks of space moving around within it. To dig in deeper on this concept, it is best to consider exactly how real estate is transacted.
An old lesson taught to me by a professor at University of Colorado at Boulder uses a group of pencils to represent the rights to space. I’m going to use that concept to try to explain exactly how real estate exchanges hands.
An investor finds a piece of property that has never been owned by another individual. The investor purchases the raw land to make improvements to that land and create a building to make money on their initial investment. The improvements that they make include a skyrise with 17 floors and a large parking structure. An appraiser or licensed real estate professional measures the building and comes to the conclusion that each floor is 10,000 square feet (SF) making the total building size 170,000 SF.
Now, imagine a bundle of pencils where each pencil represents a right associated with owning a piece of property. In the group of pencils there are many rights, but if the bundle were to be sold as a whole, the investor gets full ownership of that piece of property with no restrictions. The investor looks at the group of pencils and says, please give me the full bundle.
The US government decides to sell to the investor, but withholds one pencil, eminent domain. The government holds that right in case they decide they need that property for a higher and better use. This leaves the investor with almost no restrictions on what they can do with the property. To stay true to the scenario set out, the investor decides to build a 17 story building.
After building the skyrise, the investor wants to sell some of the pencils to make a profit. To sell these pencils the investor gives most of the remaining bundle to a leasing agent or broker, withholding only two pencils:
- The right to refuse a proposal to lease if the investor doesn’t like a tenant
- The right to fire the leasing agent or broker
The leasing agent knows the market and believes that the 170,000 SF is best bundled up into smaller groups of pencils that then represent the suites. Each group of these pencils is represented with a price, physical attributes (SF, location within the building), and different rights that determine how the space can be used.
A tenant likes a group of pencils (4 pencil suite pictured above) and begins to negotiate on one of the packages of pencils. Once the leasing agent and tenant agree on a price, the tenant is submitted to the landlord to ensure that the package of pencils can be sold (the landlord still owns the pencil of refusal!). The landlord agrees and the negotiations continue until the leasing agent decides to give the space to the tenant withholding two more pencils (these then go back to the landlord):
- The tenant only has right to the space for 5 years
- The tenant is not allowed to make physical changes to the suite after the initial build-out
The tenant takes the package of pencils and determines how they want to build out the space making partitions for offices and conference rooms. Two years into the agreement, the tenant decides that they no longer want to pay for the remaining pencils.
The tenant holds the pencil that allows them to vacate the space and find another tenant, and the landlord still holds the pencil to refuse somebody if the next tenant is not qualified for the building. The tenant takes their remaining pencils (two years went by), and bundles them up to give them to another leasing agent. This bundle of pencils is represented by the tenant’s leasing agent. That leasing agent then gets to distribute those pencils as they see fit offering up another block of space in the building.
Why does this matter as a developer at TenantBase?
In the TenantBase database buildings, building contacts, and suites exist. Suites have become known to represent the physical aspects that a tenant is leasing. That is simply not true in the real world. A listing agent might want to display a bundle of rights as a large block of space and a small block of space, but still refer to the same physical space. That leasing agent might offer a discounted price for the larger block of space, but still ask for full price on divisible pieces. That leasing agent is referring to the same pencils, but bundled them differently.
To ensure that TenantBase correctly identifies the ownership of a bundle of pencils, the company distributes that ownership across listing agreements. A listing agreement puts in place the ownership of a right to lease or sell space by any means. That means there are no physical representations of the space in question, only different packages of the same thing (ultimately the space in the building).
Classic database principles aim to ensure that the smallest representation of something is the absolute truth and dimensions might stem from that single source. When talking about listing agreements and suites, it is tempting to make a physical suite the most granular level with a dimensional table that shows the listing agreement associated with that suite. From above, a suite is not a physical space, but a representation of that space (pencils packaged differently). A listing agreement puts in place the ownership of rights to promote that space in any way. As a company, TenantBase aims to enable the owner of those rights to promote space in any number of ways. Commercial real estate is hard enough, tenants deserve a full picture of their options giving them the highest likelihood of finding and leasing the perfect space.