Whether you call it income demographics, sales projections or the business model, numbers determine whether or not a closing will occur in most commercial real estate transactions. Sales price is only one of the numbers, albeit an important one.
Consider vacant commercial property, for example. Total projected gross sales from certain products or services could be less than the projected gross sales from a well-known, worldwide retailer of coffee. Let’s just say Starbucks. If Starbucks is considering entering or expanding in a market and its sales projections meet internal criteria, then in all likelihood the company will close on the transaction assuming other development and business costs fall in line.
It’s not rocket science. Since Starbucks charges a lot for a cup of coffee, in most cases it can pay more for vacant land or a higher lease rate for the building on once-vacant land.
End users determine the value of the property. It’s along the lines of what’s called the highest and best use. It’s also why one savvy property owner in Parachute has raised his asking price for an acre just off the Interstate Highway 70 exit from $9 a square foot to about $20 a square foot. What would justify such an increase in price? I can’t say for sure, but I suspect it has something to do with the now legal sale of a product that’s green, smelly and if smoked or ingested makes the national political state of affairs for this country almost bearable to watch — or so I’ve heard. In other words, this property owner is expecting a marijuana retailer to purchase his property.
I know this sounds elementary, but numbers remain the driving force behind growth, development and jobs.
With 43,560 square feet in an acre, property priced at $5 an acre comes to $217,800. Add development and construction, and even a small building costs more than $1 million. Any business — whether it’s selling coffee, marijuana or fast food — must generate sufficient sales and keep expenses down to justify moving forward on such a project.
During the due diligence or inspection period of a commercial contract, this is primarily what the purchaser is doing — evaluating numbers. There are numbers for improvements to the site and surrounding area. There are numbers that governing authorities could require to meet code — traffic lights cost more than a few trees or bushes. There are numbers for utilities if they’re not already in place. There are numbers for site work and construction. And the list goes on and on. The numbers determine whether a deal can be made and at what price.
The numbers for the medical-related facilities under construction in Grand Junction must appear promising. A second quarter commercial real estate report prepared by Kevin Bray at Bray Commercial Real Estate shows more than 200 units of senior assisted living in two separate developments and almost 150 beds in three additional developments along Patterson Road that will be dedicated to skilled nursing and rehabilitative care.
The numbers projected for the engineering degree program at Colorado Mesa University most look promising as well with construction scheduled to soon begin on a 30,000-square-foot engineering building on the CMU campus in Grand Junction.
The numbers are also why Costco decided against building in Grand Junction about 10 years ago. In that case, the number was household gross income threshold. It’s a nice way of saying local residents don’t make enough money for Costco to build here.
It’s nothing personal, it’s just numbers. And it’s not rocket science, although I suppose that’s also about numbers.