One of the major differences between commercial and residential real estate is that commercial spaces are where business is conducted. In the course of their daily operations, businesses need to accommodate the needs of visitors, vendors, delivery drivers, shoppers, and residents. All of these people need a place to park.
For this reason, it is very common for commercial real estate investors and developers to consider the adequacy of a property’s parking when evaluating a potential deal. They may ask questions like: Is there enough parking? Does the parking meet local zoning requirements? How many parking spaces are there relative to building size? How do parking requirements change with the property type?
In this article, the answers to these questions will be explored. Once finished, readers will have a thorough understanding of the metric used to measure parking adequacy and an idea of what “good” looks like.
When evaluating a potential deal for our own account, we always review the parking capacity and do a significant amount of research to determine if it is adequate. To learn more about the deals currently being offered by First National Realty Partners, click here.
What is the Parking Ratio?
In commercial real estate (CRE), the “parking ratio” is a metric used to measure the adequacy of a property’s parking area. It is a uniform metric used for all property types and calculating it is an important part of the pre-purchase due diligence process.
What Factors Determine A Property’s Parking Ratio?
Given the importance of parking for all property types, it makes sense to explore how the number of parking spaces is determined for a given property. Broadly, it depends on a number of factors.
Different types and uses of commercial real estate properties require different parking ratio requirements. For example, a high end retail center in a suburban area with a lot of pedestrian traffic will likely require more parking than a downtown office building where workers have bus/train/bicycle options.
Local Regulations and Zoning
When developing a project from scratch, one of the major factors in determining the number of parking spaces is the local rules and ordinances that govern property development. For example, local building codes may state that a property’s minimum parking ratio is 5 parking spaces for every 1,000 square feet of leasable space in the property. These rules are also informed by the anticipated use of the property.
Property Square Footage
Logically, the larger a building is, the more parking spaces it is going to require. For example, a 300 unit multifamily property will clearly require more parking spots than a 20 unit multifamily property. Or, the amount of parking required for a 500,000 SF shopping center will be higher than a 100,000 SF shopping center.
Parking Demand / Alternate Commuting Options
The specific location of a commercial real estate property will also help to determine whether or not a property has adequate parking. For example, a suburban shopping center where driving is the primary form of transportation will require a higher parking ratio than an urban office space where there may be alternative transportation options like trains, bicycles, or subways. In such a case, a building could have a parking garage with a small number of spaces and minimal street parking while many workers use alternative commuting methods.
How to Calculate The Parking Ratio
Fortunately, the method used to calculate the parking ratio is fairly simple. The equation is:
Parking Ratio = Total Number of Parking Spaces / Total Property Square Footage
Typically, the result of the calculation is expressed as a number of spaces per 1,000 square feet of leasable space in the property. For example, if a property has 125 parking spaces and 50,000 SF of leasable space, it could be stated that the property has 2.5 parking spaces per 1,000 square feet (125/50).
Given all of the above discussion on parking ratios, it is only logical for potential investors to ask, “what is a good parking ratio?”
What is a Good Parking Ratio?
Given the number of variables that go into determining a parking ratio, the answer to the above question is…it depends. As a general rule of thumb, a good parking ratio is between 5 and 10 spaces per 1,000 SF of leasable area. But, this number could go higher or lower based on two factors.
First, the occupancy/density of the space matters When more people or businesses are crammed into a space, a larger parking lot is needed. Second, is the number of options available to get to the property. If the primary mode of transport is driving, the parking facilities need to be larger. But, if there is a nearby train stop or there are rideshare or cycling options, the number of needed parking stalls could be lower because there aren’t as many cars to accommodate.
Why The Parking Ratio Matters
Fundamentally, the success or failure of a commercial real estate property is a function of how badly tenants want to lease space in it and the amount of rents that can be charged. If a property has a generous parking ratio, a tenant is more likely to want to lease space in it because it means that there is plenty of space to accommodate their customers and workers.
As an example, assume that a retail shopping center in Boca Raton, FL has excellent tenants with popular products. But, the parking situation is difficult and inconvenient for shoppers. If this situation persists long enough, customers may stop coming. Fewer customers means fewer tenant sales. Lower sales means that tenants are less likely to renew their lease, which can set off a series of unfavorable events.
Summary & Conclusions
A commercial real estate property’s parking ratio is a metric used to measure the adequacy of its parking facilities. It is calculated as the total number of parking spaces divided by the total leasable area and expressed as a number of spaces per 1,000 SF rentable area.
In a development scenario, there is a minimum required parking ratio that is driven by local rules and ordinances. Other factors that influence the parking ratio are demand for parking, property type, property use, and building density.
There is no hard and fast rule for what makes a “good” parking ratio. It is dependent upon the factors described above. However, a general rule of thumb is that an investment grade commercial property should have a parking ratio of between 5 and 10 spaces per 1,000 square feet of leasable area.
Adequate parking matters because it is a matter of convenience and safety for workers and customers. If there is not enough, they may no longer wish to return to the property. If this happens often enough, it can cause a string of bad events for the property owner.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate (CRE) investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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