What Is Commercial Real Estate (CRE)?

Commercial real property (CRE) are properties that are used solely for business purposes or as the space needed for work rather than living space that would rather be classified as residential property. The majority of commercial real property is left to tenants for the purpose of carrying out revenue-generating activities. This broad class of real estate may include anything from a single storefront to a vast shopping mall.

Commercial real estate can be found in many different types. It can range from a commercial building to a duplex for residential use or even an eatery, coffee shop, or warehouse. Companies, individuals, and corporate interests may earn money through commercial real estate by leasing it to others or by holding it for sale and then selling it for resale.

Commercial real estate encompasses a variety of types, including retailers of all kinds, such as office spaces, hotels and resorts, strips, malls, eateries, and health facilities.

KEY TAKEAWAYS

• Commercial real estate is properties that are specifically designed to generate income or for business purposes.
• Commercial real estate is different as opposed to the residential market in that it can bring in profits for the property owner via capital gains and rental earnings.
• The four primary categories in commercial real estate include industrial, office space rental properties, multifamily, and retail.
• Commercial real estate is a source of rental income and the possibility of potential capital appreciation to investors.
• Publicly traded REITs are real estate trusts (REITs) that can be a viable method for people to make investments in real property indirectly.

Understanding Commercial Real Estate (CRE)

Residential and commercial real estate are two of the most important types of real estate property. Residential properties comprise structures that are intended for human habitation and not intended for industrial or commercial uses. The name itself suggests that commercial property is utilized in commerce, and multi-unit rental properties that function as homes for tenants are categorized as commercial properties for the landlord.

Real estate for commercial use is generally classified into four categories according to the purpose:

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

The categories themselves can be further categorized. For instance, many various types of retail real estate can be classified into

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

The same goes for office spaces. Office space is comprised of various types. It is typically described in terms of class A, class B, or class C.

• Class A is the top building for aesthetics and age, as well as the quality of infrastructure, as well as location.
• Class B buildings are usually older and not as competitive–price-wise–as class A buildings. Investors typically target these buildings to be renovated.
• Classes Cbuildings are the most stout, generally older than 20 years old. Age, and located in areas that are less appealing and in need of maintenance.

Be aware that some zones or licensing agencies additionally define industrial properties as sites that are used for the manufacturing and production of goods, particularly heavy goods. But most people consider it to be a separate category of commercial real property.

Commercial Leases

Certain businesses own the buildings that they use. But, the most common situation is that it is let. In most cases, an investor or group of investors own the property and collect rent from any company that is operating there. Commercial lease rates — the price paid to rent a space for an agreed period – are typically listed in annual rental dollars per square foot. In contrast, prices for residential properties are stated as a monthly sum or monthly rent.

Commercial leases typically last from one to 10, or even more, with retail and office spaces usually ranging from five to 10-year agreements. It is possible to contrast this with shorter-term, month-to-month, or yearly residential leases.

There are four basic kinds of commercial leases that each require different levels of accountability from both the landlord and tenant.

• A simple net lease obliges the tenant to pay property taxes.
• The Double Net (NN) lease is a lease that requires the tenant to be responsible for the payment of property taxes as well as insurance.
• A Triple net (NNN) lease obliges the tenant for the amount of property taxes as well as insurance and maintenance.
• In the terms of a gross lease, the tenant only pays rent, while the landlord is responsible for the building’s property taxes and insurance, as well as maintenance.

Managing Commercial Real Estate

The management and maintenance of commercial real estate demands full and continuous supervision by the owner. Property owners should hire an estate management firm to assist in locating, managing, and maintaining tenants, supervise the leasing process and financial options, and coordinate maintenance and marketability. The expertise of a professional management firm can be beneficial since the rules and regulations that govern these properties differ by state, county, municipal, or industry, as well as size.

The landlord has to find the right balance between maximizing rents often while minimizing vacancies and turnover. The cost of turnover can be high for owners of CRE because the space has to be modified to meet the needs of tenants – for example, the case of a restaurant moving into an area that was previously a yoga center.

How Investors Make Money in Commercial Real Estate

Investment in commercial properties could be lucrative and act as a protection against the risk of the market. Investors can earn money from the property appreciation when they sell the property. However, the most return comes from rents paid by tenants.