Understanding Commercial Real Estate: Definitions, Types, and Investment Insight

with:
Leave a comment
Facebooktwitterredditpinterestlinkedinmail

What Is Commercial Real Estate (CRE)?

Commercial real estate (CRE) encompasses properties used for business activities rather than residential purposes. It includes a diverse range of properties, from single retail stores to expansive industrial complexes, often leased to tenants for income through rent or business operations. Leasing terms in CRE can significantly differ from residential agreements, offering unique investment opportunities and challenges.

The business of commercial real estate involves the construction, marketing, management, and leasing of property for business use.

There are many categories of commercial real estate such as retail and office space, hotels and resorts, strip malls, restaurants, and healthcare facilities.

Distinguishing Commercial From Residential Real Estate

Real estate is mainly categorized as commercial or residential.

Residential properties are structures reserved for human habitation rather than commercial or industrial use. As its name implies, commercial real estate is used in commerce, and multiunit rental properties that serve as residences for tenants are classified as commercial activity for the landlord.

Commercial real estate is typically categorized into four classes, depending on function:

  1. Office space
  2. Industrial use
  3. Multifamily rental
  4. Retail

Individual categories may also be further classified. There are, for instance, different types of retail real estate:

  • Hotels and resorts
  • Strip malls
  • Restaurants
  • Healthcare facilities

Similarly, office space has several subtypes. Office structures are often characterized as class A, class B, or class C:

  • Class A represents the best buildings in terms of aesthetics, age, quality of infrastructure, and location.
  • Class B buildings are older and not as competitive—price-wise—as class A buildings. Investors often target these buildings for restoration.
  • Class C buildings are the oldest, usually more than 20 years of age, and may be located in less attractive areas and in need of maintenance.

 

Some zoning and licensing authorities further break out industrial properties, which are sites used for the manufacture and production of goods, especially heavy goods. Most consider industrial properties to be a subset of commercial real estate.

Navigating Commercial Lease Agreements

Some businesses own the buildings that they occupy. More commonly, commercial property is leased. An investor or a group of investors owns the building and collects rent from each business that operates there.

Commercial lease rates—the price to occupy a space over a stated period—are customarily quoted in annual rental dollars per square foot. (Residential real estate rates are quoted as an annual sum or a monthly rent.)

Commercial leases typically run from one year to 10 years or more, with office and retail space typically averaging five- to 10-year leases. This, too, is different from residential real estate, where yearly or month-to-month leases are common.