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Commercial Property Insider

When Commercial Real Estate Agents have to sell a property, what do they do?

14 Minute Read

“Things work out best for those who make the best of how things work out.” – John Wooden

Similar to many of our commercial real estate clients, you may have had your share of challenges over the last several years. An increase in interest rates has cut into profitability, and skilled labour is in short supply.

Regardless of the circumstances that brought us here today, this article shares insider strategies for what a commercial real estate agent does to sell or lease a property.

Our promise to you is that after you read this article, if you are considering selling or leasing your commercial property yourself, you’ll be better equipped to make the most of how things may be working out for you and your business.

A Step-by-Step Guide to Selling or Leasing Your Commercial Real Estate

1. Understand economic trends that impact the commercial real estate market

Although there are unique circumstances that each business owner faces, due to the challenges specific to their industry, it is common for owners to experience similar challenges as the economic tides change.

There is a correlation between the strength of the economy and prices in commercial real estate. Having this understanding in terms of macroeconomic (national) and microeconomic (local) trends will help you understand the trends that impact businesses.

By recognizing trends in the overall strength of your country’s production in terms of Gross Domestic Product (GDP), employment figures and interest rates, you’ll be able to sense what opportunities or challenges may lie ahead with the demand for the economy, and the ability for potential purchasers to qualify for financing.

One of the best sources of concise economic information we’ve found is through a subscription to your provincial government’s local economic division email list for economic reports. There may be weekly or monthly updates on what your local economy is experiencing in terms of positive or negative changes in economic indicators such as employment, gross domestic product, or oil prices. For a more in-depth understanding, explore the related insights on our article, Who Wants to Understand the Real Estate Market?

You can also subscribe to a quarterly commercial real estate report that tracks trends in vacancy rates, $/SF, or cap rates, which will help you understand the economic factors impacting real estate value specifically.

A report from a reputable commercial real estate brokerage will help you efficiently understand factors that may impact your property. See our Insights and Research page for examples of reports.

2. Consider your long-term objective and whether you’ve chosen the right strategy to achieve it

Now that you understand the external economic factors that may impact the valuation of your commercial real estate, determine if selling or leasing is the best strategy for your goals and objectives.

A good commercial real estate broker near you will help you understand these investment strategies and how they may fit into your long-term objectives. Other strategies to consider include a sale, leaseback, refinance, or renting out the property to receive rental income as an investment strategy.

We also recommend that you consult with a real estate accountant and lawyer. It is valuable to ensure you’ve considered all your options, as a sale may trigger a significant capital gain, resulting in taxes payable.

From your discussion with service providers, you may be surprised that things such as increase in interest rates or the timing of the tax implications of a sale may cause you to reevaluate your strategy. Gaining insight into your tax liabilities allows you to plan ahead and avoid any unforeseen financial burdens.

3. Understand property valuation and how location can impact value

After getting clarity that you’ve determined the most appropriate strategy, it’s crucial to have an accurate property valuation. A well-priced property is one of the best secrets of a commercial real estate agent!

If a property is priced too high, this may ultimately cost you more money through holding costs such as mortgage expenses, property taxes, and a lost opportunity cost in the event of a sudden change in the commercial real estate market or a market collapse. If a property is priced too low, you may be leaving money on the table.

To get an appropriate property valuation, speak with a professional appraiser or a reputable commercial real estate broker who specializes in your property type. An accurate appraisal will help the banks with underwriting a commercial real estate loan!

Your representative will conduct a comparative investigation of previous sales of similar properties in your region. They will examine more than just the sale prices, but as well as the individual qualities, such as its location, condition, size, and market circumstances. These factors will be factored into one of the below analysis types to help you arrive at a competitive and justifiable asking price.

The types of valuation methods

CMA (Comparative Market Analysis)
Cost Approach
Income Approach

Comparative market analysis

Comparative Market Analysis, or CMA, is a property valuation process that determines the price of a property based on comparable properties that have recently sold near you. This is one of the most common methods of valuation, and it is based on the idea that similar properties will sell for a similar price. This type of valuation method is commonly used for Owner occupiers.

For specific sales price information, you can also check out the listings and sales of properties through websites such as Realtor.ca, Loopnet.com, or Spacelist.ca. (Alternatively, if you are looking to buy your next property, this is one of the best places to start!) These are some of the most common places to list properties for sale and places where buyers search for commercial property; however, a commercial realtor in your area will have access to additional property sales information that may not be shown on these websites through the additional databases that their company may be subscribed to.

Cost Approach

Another valuation method is the cost approach, which determines the worth of a property based on the cost of replacing or reproducing it.

This method is frequently employed for assets when the primary value is in the structure itself such as newer buildings with no depreciation, or for insurances purposes for replacement value. To calculate the worth of a property, it considers elements such as building costs, land value, and depreciation.

Income Approach

The income approach is especially applicable to income-generating properties that you are a Landlord of, such as commercial buildings with tenants.

This method determines the worth of a property based on its actual income stream or future earning potential. It considers elements such as rental income, operating expenses, and the capitalization rate.

Analyzing current capitalization rates, often known as cap rates, is critical for revenue-producing properties. The link between a property’s net operating income (NOI) and its present market value is shown in cap rates.

Selecting the most appropriate valuation method

The best market valuations use a combination of one or more of the above methods to ensure that the valuation is accurate. Note that one valuation method may ultimately prevail, depending on which of the above influences is most appropriate for your specific circumstances.

We recommend engaging with a commercial real estate appraiser or an experienced commercial real estate broker to assist you in making an informed pricing decision.

4. Other considerations to factor into your building’s valuation

Although the location of your commercial building is an unchanging factor, the area around your property will evolve, which will impact the price you are able to receive upon its sale or lease. These changes can occur because of upcoming infrastructure developments in your area, such as new motorways or other public transportation changes, or changes in nearby area’s zoning.

An important and often missed feature to factor into a property’s valuation is the impact of consumer or business preferences. Through the passage of time or an enhancement in technology, the desirability of an area or of specific property features may have changed in the concept called functional obsolescence.

For example, warehouse buildings with a high ceiling height and large yard may be more desirable than properties with a low ceiling height and small yard. This may because as technologies improved and consumer preferences shifted to a high demand for online shopping, making industrial distribution facilities more desirable. Tenants and buyers may be seeking the ability to stack inventory and receive large shipments, which may force older buildings into obsolescence. When the demand for a property type is low, the price of the property is often negatively impacted.

5. Analyze deferred maintenance and property improvements

Now that you have a clear understanding of the comparable sales of properties near you, and other influences that impact valuation, you must take an objective look at the condition of your property. 

It is critical to have an unbiased perspective on the pros and cons of your building. If you allow your attachment to the building to cloud your reasoning, you could be costing yourself a lot of money in terms of time on the market or missed opportunity costs in the event of a market shift or collapse.

Examine your property carefully and objectively to determine whether any renovations or modifications are required to increase its value and appeal to potential buyers. Improvements to consider may include improving the building’s facade, interior spaces, or landscaping to make the property more attractive to a potential buyer.

It is important to note that improvements may not immediately boost a buyer’s price. Property owners may be tempted to leave upgrades to the buyer, thinking buyer won’t pay more for revisions. Although there is merit to the idea, replacing like damaged overhead doors or water-stained ceiling tiles may boost desirability and market demand (or stop impeding it), which might raise the offer price.

In our experience, if there is significant deferred maintenance, a buyer will discount their offer price significantly and often in multiples of the cost and energy required to replace the items.

Pro tip:

Prior to listing your property, be prepared to offer a detailed property history, including dates and amounts significant capital improvements such as roof replacements, information on previous tenants, or copies of permits for any property modifications that have occurred over the years.

This historical information gives potential purchasers perspective, and reduces the perceived downside risk through an increased confidence in your property. This willingness and preparedness to discuss major improvements encourages trust by exhibiting your openness, and it is a helpful negotiation tip to help protect your property’s value.

6. Understand the property’s current zoning classification

Understanding your property’s zoning classification and land use is crucial to effectively optimize your marketing efforts. Not all commercial real estate is appropriate for all users! 

Commercial Real Estate Infographic - City Commercial

How do you determine your property’s zoning and land use?

The municipal government establishes different areas or zones for businesses to operate in. Zoning regulates how a property can be utilized and what types of businesses or activities are permitted.

One of the primary reasons this is done is to ensure there is harmony between residential neighbourhoods where people live and the commercial districts where business is conducted. Some businesses may cause noise or other nuisances, so the municipal government has set up a plan to group certain classifications of businesses together to allow for cohesive land use.

The most effective way to determine your commercial real estate zoning is be to call your local government and ask to be transferred to a department such as the Planning Department. You would provide your property address, and they’ll be able to advise you on the specific zoning for your property.

This information is typically also available online through an interactive map feature; however, contacting the city directly may be the most direct approach if this is your first time.

You can also make an in-person appointment with your local government’s planning department to examine all permits and zoning-related details to ensure that your property complies with local requirements.

Pro tip:

Beside the importance of zoning requirements, which allow someone to operate their business in a particular building, the zoning list can often provide a helpful summary of the typical types of uses that could be appropriate for your building and how you should adjust your marketing to appeal to buyers of commercial property.

By adjusting your marketing approach to align with your property’s classification, you can attract the right audience and increase the likelihood of a successful sale.

Pro tip:

Before offering your property for sale, we recommend taking care of any outstanding permit non-compliance issues whenever possible to streamline the sale process.

We recommend that you seek legal assistance to ensure that you are completely informed of any mandatory disclosures during the sale. If your building does not meet any required permits or has any potential environmental contaminants, disclosure of this may be required. Noncompliance or contamination might cause problems during the sale process, potentially derailing the transaction. Lawyers can help you navigate the appropriate paperwork to help protect your rights.

7. Engage due diligence service providers and gather financial records

Now that you have a solid foundation of your property valuation and zoning, what comes next? What type of information or reports do buyers expect you to provide?

If you aren’t working with a commercial real estate broker who provides suggestions to improve the marketability of your property, perhaps consider getting a pre-listing inspection. This is a preventative measure that can discover possible problems before they become deal-breakers.

By proactively fixing important issues, you can increase the desirability of your property and streamline the negotiation process. It is best practice as it indicates openness and a readiness to collaborate with possible buyers to address any concerns.

Compile a detailed list of closing documents, which can include:

☐ Real Property Reports
☐ Environmental Reports
☐ Inspection Reports
☐ Property Tax Bills
☐ Rent Roll (Investment property only)

Pro tip:

Besides providing accurate information about the property, clear financial information will help to highlight possible opportunities for efficiency in business operations, revenue growth, or expense savings.

Especially for investment properties, as the property’s value is often based on its financial performance, clearly organize your financial records. This includes rent rolls and leases for revenue properties, gathering utility bills, and maintenance charges.

Providing a clear vision of how the property will provide future untapped value might encourage purchasers to proceed with the purchase. In our experience, having updated copies of reports such as an Environmental report or a current Real Property Report will allow the conditional periods to be shorter.

8. Engage due diligence service providers and gather financial records

One of my mentors once told me, Sales is easier when someone wants what you are selling! Effective property positioning to appeal to your target purchaser or tenant and ensuring the right people see your property make the ‘closing’ of the sale or lease much easier.

You want to position your property so effectively that people are eager to view it! In our experience, the best way to highlight the best features of your property and gather sufficient buyer interest is to gather the following:

☐ High-quality photographs

Invest in high-resolution photographs that strategically highlight your property’s best features. These photographs make an excellent first impression and can pique the viewer’s curiosity.

☐ Gather relevant property specifications

Collect specific property details such as age, size, zoning, and clear height. Providing this information upfront helps buyers determine whether the property meets their requirements.

Although it requires effort at the onset, ensure that you include a thorough amount of detail to optimize your property listing with a sufficient level of detail of facts, high-quality photographs, and accurate and up-to-date contact information.

Pro tip:

If you are unsure of what information to include, refer to other listings in your area of similar properties, and you’ll start to notice a trend in what information a buyer or tenant will find valuable.

☐ Create high-quality marketing collateral such as Brochures and Floor plans

Brochures should showcase the unique aspects of your property. Success means that you’ll help a potential buyer or seller envision themselves in the property, and you’ll be able to articulate its value and why a property is attractive to their needs.

Highlight any features that add to its allure, such as location advantages, recent renovations, or possibilities for increased revenues.

You can hire a floor plan measuring company to provide you the dimensions of your property.

☐ Install a large, professional sign

Installing a sign enhances visibility and brings attention to your listing by leveraging drive-by traffic and catching the interest of nearby prospects who might be in the market for an alternate location.

☐ Maximize digital mediums

For a high-exposure strategy, you might consider posting your listing on popular web platforms with a wide reach. Commercial real estate agents use platforms such as Realtor.ca, Loopnet.com, Spacelist.ca, Costar.com, and Kijiji.ca are electronic platforms to help find buyers for commercial property. Using these platforms boosts the visibility of your property and increases the likelihood of attracting a diverse pool of potential buyers.

☐ Sponsored ads on platforms such as Google or Facebook

Consider investing in sponsored ads to supplement your web listings to increase the visibility of your property in online listings. These strategically placed ads can propel your property to the top of search results, attracting the attention of more prospective buyers.

While sponsored advertising does have an associated cost, the additional visibility and opportunity for a faster sale can make it a worthwhile investment.

☐ Network with Neighbours

Don’t underestimate the value of networking within your own neighbourhood. Share your listing with local property owners who may know of businesses looking to grow or relocate. They can provide crucial referrals or insights or introduce you with possible buyers.

☐ Phone Prospecting with Your Property Brochure in Hand

Picking up the phone to call someone who isn’t expecting your call is one of the reasons why commercial real estate agents make commissions. This approach, although effective, is littered with many negative emotions as you come face-to-face with rejection.

9. Negotiation strategies and advice

Negotiating a real estate transaction, particularly in the commercial sector, may be a complex procedure.

Here are the best pieces of advice that we can share with you:

Establish a set of qualification questions

This will help you vet the financial strength and ability to close a potential buyer or tenant.

Financing, in particular, is an important element for determining their financial strength. These queries should dive into the buyer’s financial capacity and available financing sources. By acquiring this information ahead of time, you may shorten the negotiation process and focus on serious buyers. It may also prevent you from wasting time and effectively money on the wrong unqualified purchaser.

Establishing a format for the basic terms of a lease or purchase

Having a standardized template that you use to establish the terms and conditions on which both you and a prospective purchaser or tenant would be willing to reach an agreement

A quick Google search for a term such as ‘Letter of Intent’ will provide a variety of different formats.

Remember that whatever terms and conditions you agree with a buyer should be transferred to a commercial real estate lawyer for a full-form lease agreement or purchase agreement.

Understand market value

If you’ve been following our recommended order this step should already be covered, and you should have a clear understanding of the market valuation ranges so you know what to expect.

Pro tip:

It is not uncommon for the first offer to come as a surprise, as a buyer may have a different pricing expectation or may be testing their luck to determine your level of motivation to sell or lease.

Timely Engagement

It is critical to engage with interested parties in a timely, professional, and cooperative manner. Quick responses to email or phone questions can make a substantial difference in the outcome of your property sale. Maintain open lines of contact and be ready to respond to queries or provide further information as soon as possible.

Remember, people prefer to do business with someone they have a positive rapport with so we recommend avoiding excessive complaining or demeaning the other person in the transaction and their viewpoints. Although this sounds obvious, it is a recommendation worth stating! These cooperative and professional best practices help to develop trust with a potential buyer, which increases the likelihood of successful negotiations.

Consider working with a Commercial Real Estate Agent

The help of a good commercial real estate broker will be invaluable to maximizing your proceeds on a sale; however, there is an associated cost to engaging the best. The compensation an agent receives in the form of real estate commissions are often deducted from the proceeds of a sale upon the closing of the transaction.

Commissions can be a sizable expense so they are an important consideration to factor into the calculation of your net proceeds. In our experience, real estate commissions can pale in comparison to the potential downsides of missing disclosures, mispricing a property, or the potential money lost through not getting an adequate level of exposure to maximize your sale price. Download our Compensation Calculator: Commission Calculator – City Commercial

As discussed in our article Do You Make These 5 Mistakes When Selling Without An Agent?, we talk about the pros vs cons of working with an agent, and that according to the National Association of Realtors, on average listed properties sell for 6% more than unlisted properties, so check out the article for more details.

Conclusion

We covered the steps that a commercial real estate broker goes through to list your commercial real estate. The right agent will help to maximize your sale price, save you time and minimize your downside risk by advising you on which disclosures you need to make.

About City Commercial: We specialize in Industrial real estate in Edmonton, Alberta, with the goal of one day of serving business owners across Canada. If you need assistance in locating a skilled commercial real estate agent who help you shortcut this above process, reach out to us. We’ll leverage our databases and our knowledge of who is good to connect you with a few agents near you that we’d recommend in your area.

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