When you think of real estate, you might only think about the housing market. What about the other side of it—commercial real estate (CRE)? What is commercial real estate? What kinds of CRE exist? Should you invest in CRE?
In this blog, you’ll get to know what commercial real estate is, the major types of commercial properties and the basics of investing or managing commercial real estate.
What Is Commercial Real Estate?
What is commercial real estate? It’s any property used solely for business purposes and not residential. Unlike residential property, CRE is a workspace dedicated to business only. In gray areas like home-based businesses, zoning laws have the final say on whether or not the business can be set up from the home.
Outside of those edge cases, commercial properties are places of businesses. Gas stations, office buildings, retail stores, restaurants and even multi-family residential units are all examples of commercial real estate.
The Major Types of Commercial Real Estate Properties
Retail stores are the go-to examples of CRE. They can be standalone stores, in strip malls or anchored by big-box retailers like Best Buy or a Costco. There may also be restaurant tenants within these same strip malls.
Strip malls can be from 5,000-10,000 square feet while “power retail centers” can be anywhere from 30,000-200,000 square feet. Sitting at the top of the square-footage food chain are shopping malls, coming in at a whopping 400,000-2,000,000 square feet.
Office spaces and buildings can vary by size, amenities and location. All three of these factors influence a commercial property’s price per square foot. Specialty office spaces like medical offices can be even more expensive for tenants to rent.
Class A, B and C office buildings range from brand-new to in-need-of -repair or a complete renovation. A brand-new building with cutting-edge amenities or a building that has just been renovated could be considered Class A, especially if it’s in a prime location. Class B buildings can be an investment, with only some renovations and improvements needed to bring it up to snuff. Class C office buildings, on the other hand, will need some serious TLC and may not be in a very desirable area.
Beyond manufacturing, industrial commercial real estate property can encompass warehouses and “flex” spaces that can be easily transformed. These industrial properties are treated as more viable opportunities for investors over a more specialized manufacturing space.
With industrial commercial real estate, the easier it is to repurpose, the easier it is to rent out. It’s the Swiss Army knife of property.
Multi-family residences are actually classified as commercial real estate. Apartment buildings, both high-rise and low-rise, have shorter lease terms compared to an office space. Tenants will need to renew their lease every year with the landlord or management company, whereas a business may want to rent an office space for several years.
Because of the nature of these leases, they can be considered less viable as investments. They also have their own regulations and codes specific to them.
You can think of land as untapped potential for commercial real estate. That land can be developed and turned into anything, from a grocery store to a hair salon.
Land can have some specific needs before it can be developed. It can need clean-up or be a vacant lot where there was once a piece of property. While the possibilities can be endless, there may first be some environmental considerations to take into account first before any development can proceed.
Investing in Commercial Real Estate
CRE can be a tantalizing investment opportunity. However, as pointed out above, some types of commercial real estate are better opportunities than others.
When approaching commercial real estate investment opportunities, treat it as you would any other investment. Get advice from players already established in the commercial real estate game. Do your research and due diligence before investing in any property. You don’t know what you don’t know, and an insider point of view will give you a leg up on your competition.
It will take more funds to invest in commercial real estate property than residential, but it still provides income like residential investment properties. If you plan on investing in commercial real estate properties, you need to do your research.
Managing Commercial Real Estate
Owning a piece of commercial real estate means maximizing the return on investment with rent. Often, landlords will need to minimize turnover and keep tenants happy to accomplish that goal. High turnover rates are obviously bad for business, especially if the space needs to be renovated over and over again to fit a new tenant’s needs.
A smart strategy for landlords is to employ a commercial real estate firm to manage all aspects of managing their property. A professional CRE firm will have the know-how and insight to keep tenants happy and find new ones. Plus, they’ll have the right connections to find those new tenants and know local rules and regulations for CRE. It’s a win for the landlord and their tenants.
What is commercial real estate? It’s a lot of things when you think about the different types of commercial real estate out there, going beyond office spaces and shopping centers. Commercial real estate can represent investment opportunities for landlords and a place to grow a business for tenants.
If you’re looking for investment opportunities, don’t limit yourself to just residential properties! Commercial real estate can be just as viable an opportunity with the right CRE firm at your side.