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. Investors may ask questions like: Is there enough parking? Does the parking meet local zoning requirements? How many parking spaces are there relative to the building’s size? How many parking spaces are required for a commercial building based on property type?
In this article, the answers to these parking questions will be explored. We’ll explain what is a parking ratio, how to calculate a parking ratio, the factors that determine a parking ratio for a property, and what is a good parking ratio. Once finished, readers will have a thorough understanding of the metric used to measure parking adequacy and an idea of what a “good” parking ratio 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 a Parking Ratio?
A “parking ratio” is a metric used to measure the adequacy of a property’s parking area. In commercial real estate (CRE), parking ratio is a uniform metric used for all property types, and calculating the parking ratio is an important part of the pre-purchase due diligence process for investors.
What Factors Determine a Property’s Parking Ratio?
Given the importance of parking for all commercial 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.
1. Property Type/Use
Different types and uses of commercial real estate properties have 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.
2. Local Regulations and Zoning
When developing a commercial building 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.
3. 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.
4. 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
The method used to calculate the parking ratio is a fairly simple equation that divides the total number of parking spaces by the total square footage of the real estate property. The parking ratio formula looks like this:
Parking Ratio = Total Number of Parking Spaces / Total Property Square Footage
Typically, the result of the parking ratio calculation is expressed as a number of spaces per 1,000 square feet of leasable space in the property. For example, if a commercial 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 “what is a good parking ratio” is that it depends. As a general rule of thumb, a good parking ratio for a commercial property is between 5 and 10 spaces per 1,000 SF of leasable area.
However, the number of parking spaces required for a commercial building could go higher or lower based on two factors.
First, the occupancy/density of the property matters for its parking ratio. When more people or businesses are crammed into a space, a larger parking lot is needed.
Second is the number of transportation 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 Does the Parking Ratio Matter for Commercial Real Estate?
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. Parking ratio 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 parking, customers 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 info@fnrpusa.com for more information.
