Whether you’re buying, selling, or, most importantly, renting an investment property, there is technical verbiage you should be familiar with in order to effectively navigate your way to an ideal return. PSF is the perfect example of terminology that will help investors communicate with tenants, prospective buyers, and sellers in real estate.
Understand what PSF means in real estate and why it’s so important in different investing contexts today.
What Is PSF?
PSF means “per square footage.” PSF is the most straightforward way to communicate the size of a property and its value simultaneously.
Per square footage valuations may have different meanings in different contexts. Furthermore, depending on the manner of investment, per square footage can have varying implications, such as whether an asset is being bought and sold or rented.
No matter the investment context, PSF is a concrete measurement of a real estate asset’s value. As a fundamental measurement of value, PSF can be used in a number of ways that helps real estate investors communicate their property’s value.
When Is PSF Used?
PSF is used in commercial real, industrial real estate, vacant lots, and residential real estate investments.
PSF in Commercial Real Estate
Per square footage is a fundamental part of commercial investment properties. When leasing a commercial property, landlords will express the rent to be paid by the tenant in cost per square foot.
For example, suppose a property owner is leasing a 500-square-foot retail storefront. They intend to rent the space out for 25 dollars per square foot. When drawing up the lease, the monthly rent will be expressed as 25 dollars PSF for a year-long lease rather than the total monthly rent of the space, which would amount to 12,500 dollars per month.
Commercial real estate properties are generally larger than residential spaces. Examples of commercial real estate might include office space, retail storefronts, restaurants, and so on. Considering their larger size and the fact that tenants utilize that space for their business, rent is listed in per-square footage terms.
Additionally, commercial real estate may be listed on the market in terms of per square footage as well. Prospective buyers for commercial properties may not see its listed price in the hundreds of thousands or even millions of dollars. Instead, they would see its market price listed in terms of its PSF value.
PSF in Industrial Real Estate
Industrial real estate’s value is typically expressed on a per square footage basis in its listed market price and in lease agreements. Industrial properties are even larger than commercial real estate. Due to their large size, their valuation in a lease agreement is most easily expressed in PSF terms, just like in commercial rental property leases.
The key difference between commercial and industrial real estate is where they fall in the supply chain. Commercial properties are where businesses generate revenue through customer-facing retail or services performed in an office setting. Industrial properties play a role in supporting the larger business model and function as intermediaries of sorts within storage and distribution, the manufacturing of products, and beyond.
Examples of industrial property include warehouses and factories. These kinds of buildings are substantially larger than most other property types, meaning they are most easily valued through PSF.
PSF in Vacant Lots
Vacant lots are most easily expressed in per square feet because they consist exclusively of empty land.
That being the case, investors interested in acquiring vacant lots need to know the square footage of the prospective property. Even modestly sized vacant lots may have a large enough sq ft footprint that makes expression is PSF the easier option.
PSF in Residential Real Estate
PSF is not typically used in a residential real estate context because structures are rarely large enough to warrant valuation on a square footage basis. Furthermore, residential properties don’t need to outline the size of the space from a business perspective; size is important for livability standards, but businesses desperately need to know the size of their space because it is central to their business operations.
Leasing a residential space doesn’t require explicit mention of PSF in regard to rent, but per square footage may be helpful when assessing the market at large. For instance, analyzing the PSF of local apartment units helps landlords set accurate rates for rent. Tenants can compare two units on their PSF to find a better deal.
Additionally, PSF can be useful when buying or selling residential properties. PSF can help establish competitive listing prices by comparing average PSF in the given real estate market.
Why Is PSF So Important?
PSF is most useful for commercial and industrial rental properties. Rent is explicitly listed in terms of PSF, so real estate investors who own commercial or industrial rental properties must be prepared to draft their leases in terms of PSF.
Beyond the direct usage in explicit terms, PSF presents investors with the opportunity to make high-resolution comparisons between multiple properties. Using PSF as a basis for analyzing the rental market can help landlords set competitive rates for their spaces; tenants can shop around and find the best possible rates by the square foot.
For any property type, comparing two different properties in terms of PSF can make all the difference in getting more value for every square foot.
PSF in Real Estate Leases
Because commercial and industrial rent is set in terms of PSF, it may not include certain expenses depending on the type of lease. Commercial and industrial properties may use different kinds of leases that may better suit the needs of the tenants and landlords.
Two examples of lease types investors should know in a PSF context are gross leases and NNN leases.
Gross leases are a conventional lease type most people will know; gross leases are the standard for residential leases and most other rental agreements. In a gross lease, landlords will pay operating expenses which they may factor into the rate they set for rent.
For commercial and industrial leases, gross leases are straightforward agreements where tenants pay the PSF outlined in the lease agreement. The rate established in the lease may factor in operating expenses, but the PSF rate is what tenants can expect to pay.
Triple Net Lease
Triple net leases, NNN leases, may be used in commercial and industrial rental properties. Triple net leases may pass operating expenses onto the tenant for a more amenable arrangement between both parties.
Because commercial and industrial properties tenants businesses, they may have a greater need for control over the property. In exchange for a lower base PSF rate and more autonomy over the property, tenants may agree to take on operating expenses like insurance payments, property taxes, and required maintenance for the property.
NNN leases are a clear example of how PSF rates may not always tell the full story of a rental agreement. PSF rates will not reflect the monthly payments the landlord expects in a NNN lease.
PSF Is an Instrumental Part of Real Estate Investing
PSF is an important part of real estate. Commercial and industrial property owners will need to use PSF when drafting their leases. Investors may benefit from comparing PSF for prospective investment properties—to assess the competitiveness for rates in the rental market and the list price of homes on a square footage basis.
PSF is an example of how familiarity with more nuanced parts of real estate can make all the difference in your investing. The deeper your knowledge about the many facets of real estate investing, the better equipped you are to make better decisions.