by Prince Licaylicay | Aug 20, 2021 | All Articles, Investing
What does CAM in CRE mean?
CAM, or Common Area Maintenance, refers to the fees that tenants pay each month to cover the costs of maintaining a property. These fees ensure that the building stays functional and in good condition. Importantly, landlords do not profit from CAM fees; instead, they use the funds solely for property maintenance. However, the specific costs included in CAM fees depend on both the type of property and the lease agreement between the landlord and tenant.
What Are CAM Charges?
In Commercial Real Estate (CRE), CAM charges often appear alongside Triple Nets (NNN). CAM charges form just one part of the total operating expenses, which also include insurance and property taxes. When someone refers to “the CAMs,” they typically mean the total operating costs of the property. Since CAM charges directly impact the net operating income (NOI), they are a crucial element in any lease agreement.
Types of Areas Covered by CAM Charges
Tenants leasing commercial properties usually pay for two types of spaces: usable areas and common areas.
- Usable area: This refers to the spaces that tenants exclusively occupy, such as private offices, restrooms, storage rooms, and other personal spaces.
- Common area: This includes shared spaces that benefit all tenants, such as lobbies, public restrooms, elevators, corridors, parking lots, and stairwells.
Where Can You Find CAM Fees in a Lease?
Typically, landlords outline CAM charges in the lease contract. If CAM fees are not specified, you should clarify this with your landlord. In some cases, CAM fees may already be included in your monthly rent. Therefore, it is essential to understand the exact CAM fees before signing a lease to avoid potential surprises down the line.
What Do CAM Charges Include?
The specific costs covered by CAM fees depend on the lease agreement and the property itself. Common CAM charges include:
- Property maintenance
- Roof and exterior building repairs
- Insurance, permits, and taxes
- Administrative fees
- Pest control services
- Security systems and services
- Operating expenses like landscaping, parking lot cleaning, lighting, signage, and snow removal
These charges can vary significantly between properties, so it’s critical to review your lease terms to understand what CAM expenses you will be responsible for.
How to Calculate CAM Charges
CAM charges are usually calculated on a per square foot (PSF) pro-rata basis. Essentially, the more space you lease, the higher your CAM charges will be. Your CAM fees are determined by the percentage of the total property that your leased area occupies.
Example:
- Tenant’s leased space: 15,000 SF
- Gross leasable area of the building: 60,000 SF
To calculate:
15,000 SF ÷ 60,000 SF = 0.25 (or 25%)
If the monthly CAM expenses total $2,000, you will pay 25%, or $500, in CAM fees each month. Typically, landlords reevaluate CAM charges annually, and they remain fixed for the year.
Summary
In conclusion, CAM charges are a vital part of any commercial real estate lease. Understanding what these charges cover and how they are calculated will help you manage your monthly expenses more effectively. Therefore, it’s always wise to review CAM terms carefully before signing any lease agreement to ensure you are fully prepared for the associated costs.
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The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
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by Prince Licaylicay | Jul 15, 2021 | All Articles
Absorption, or the absorption rate, is a key metric in Commercial Real Estate (CRE). It measures the difference between the amount of space vacated by tenants and the space that gets leased or sold within the same time frame and locality.
Simply put, absorption is the rate at which commercial space is “absorbed” (leased or sold) over a given period in a specific market. This rate can be either positive or negative, depending on market conditions.
Absorption and Vacancy: A Close Relationship
Two important metrics often go hand-in-hand in CRE: absorption and vacancy. Vacancy refers to the percentage or number of units or square feet that are available in a commercial property. A lower vacancy rate usually means higher rental income for the property. Both vacancy and absorption rates play a crucial role for investors when deciding whether to buy, hold, or sell commercial properties.
Gross Absorption vs. Net Absorption
When discussing absorption rates, it’s essential to differentiate between gross absorption and net absorption.
- Gross Absorption refers to the total amount of space tenants move into within a specific period, without considering the amount of space vacated.
- Net Absorption measures the total amount of space leased, subtracting any space vacated in the same period. This metric is particularly important because it helps investors understand market supply and demand trends.
Focusing on Net Absorption
Since net absorption is the metric most frequently used by commercial real estate investors, it’s vital to understand its implications. Positive absorption means more space is being occupied than vacated, often leading to increased rental rates. Negative absorption, on the other hand, indicates that more space is being vacated than occupied, which can result in lower rent rates as landlords compete to fill vacancies.
Knowing the net absorption rate in a specific area allows investors to forecast cash flow and make informed decisions about their properties.
How to Calculate Net Absorption and Vacancy Rates
Absorption and vacancy rates are often calculated together. For example, let’s assume a commercial property has 24,500 square feet of leasable space, and 2,250 square feet are available across five units.
Vacancy rate is calculated as:
2,250 SF (vacant space) ÷ 24,500 SF (total leasable space) = 9.2% (vacancy rate)
If a new tenant leases 1,200 square feet, the vacancy rate changes:
2,250 SF (vacant space) - 1,200 SF (leased space) ÷ 24,500 SF = 4.3% (new vacancy rate)
This leaves 1,050 square feet vacant, creating an annual net absorption rate of 53.3%:
1,200 SF (leased) ÷ 2,250 SF (available space) = 53.3% (net absorption rate)
Thus, this scenario shows a positive net absorption rate over the year.
Factors That Influence Net Absorption
Several factors can impact net absorption, and understanding these can help investors make informed decisions.
1. Availability
Availability of commercial space in the area plays a significant role. In regions with limited availability, new businesses quickly fill the vacant spaces, resulting in a high net absorption rate. Conversely, in areas with abundant available space, the net absorption rate tends to be lower due to competition among properties.
2. Pricing
Rent rates also influence net absorption. Tenants look for spaces that meet their needs at affordable rates. By pricing your property competitively, you can attract tenants and reduce vacancy rates, leading to a higher net absorption rate.
The broader economic environment significantly impacts absorption rates. For example, during the COVID-19 pandemic, many businesses either shut down or moved to remote work, resulting in vacated commercial spaces. This shift led to lower absorption rates as companies sought smaller spaces to reduce costs. Economic shifts like these can dramatically affect market absorption trends.
The Bottom Line
Commercial real estate is a competitive market, and understanding metrics like net absorption can be a game-changer for investors. By gathering data, analyzing trends, and factoring in market conditions, you can make more informed decisions that drive the success of your investments.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!
