When purchasing or renting commercial property, the listing price might not always give the full price of the property itself, but rather might say something like “$10 PSF.” It’s important to understand this terminology and its definition so you can make informed decisions in your commercial property transactions.
PSF is an abbreviation of per square foot, and it is the metric used to calculate many commercial real estate transactions. For instance, annual leases for commercial property might be valued at $20 PSF, meaning $20 per square foot. If a 500-square-foot property is leased at $20 PSF, then the annual rent would be $10,000, or about $833 per month. With residential real estate, when you rent an apartment, you’re usually given the full dollar amount per month. You might sign a 12-month lease for $1,000 per month. Commercial real estate, on the other hand, usually discusses rent not on a monthly basis, but per square foot. When you look at a listing for a commercial property, you’ll often see something listed as $20 PSF, showing what you pay for each square foot per year.
When looking at the PSF figure for commercial properties, you also want to check if you’re looking at the gross lease or net lease rate. With an “NNN lease” or triple net lease, your monthly expenses will be higher than the PSF number. With the net lease, the tenant is responsible for paying property taxes, insurance and maintenance of the common area, in addition to the monthly rent. With a gross lease, the tenant is only responsible for paying the rent, and the landlord pays for everything else. Net leases are common in single-tenant properties, whereas gross leases are more common with multifamily properties. Nonetheless, net leases are very common with larger commercial properties.
“The most common industrial property lease is a net lease,” said David R Dunn, a Strategic Real Estate Advisor at Real Estate Bees. According to Mike Riso, another Strategic Real Estate Advisor at Real Estate Bees, triple net leases are more likely to change year to year, with the monthly rent fluctuating depending on “operational and controllable costs.” In situations where the common area maintenance, or CAM, is less than expected, tenants could be awarded with a CAM credit, Riso said. Another, less common type of lease is the modified gross lease, in which the tenant and landlord share some of the additional expenses, such as property maintenance.
A fair asking rent PSF in real estate depends primarily on the “market rent that other properties of the same size and age are asking,” Dunn said However, various factors can affect that price. First, you need to make sure you’re looking at the terms of the listing correctly, paying attention to whether the PSF price is listed by year or month. Some areas might advertise PSF per year, with a range of $10 to $50 or more PSF, Riso said. However, when the PSF is advertised per month, you could see ranges in between $0.50 to $3 or more PSF. “It is really impossible to say what a fair price of rent on a square foot basis is because that will depend on so many factors,” said Riso, the first of which is geographic area. Riso added, “One area of the country, state or city might be fairly priced at $1 PSF per month, and in the same general geographic area, other properties might command three to five times more than that.”
Another consideration is the use of space, Riso noted. Industrial spaces are likely to have the lowest PSF rates, even though there is a large amount of space, whereas office spaces might command higher PSF for a smaller space. And again, this variance depends on the geographic area. PSF is also used for pricing in construction and development. For example, an apartment unit costs roughly $398 PSF to build. Your commercial mortgage broker will be able to help you appraise the value of your commercial property, either with a broker opinion of value (BOV) or by helping you get a commercial property appraisal. Commercial brokers have access to a wide network of hard money lenders, debt funds, banks and credit unions.
PSF is an abbreviation that won’t be hard to remember as you get more familiar with commercial real estate investing. This acronym will show up again and again. When trying to determine whether or not you’ve found a fair PSF deal, it’s a good idea to look at other commercial properties in the area to see what the prices are at that time. If other properties have comparable prices PSF, then you know you’ve found a fair deal.
