What Is Commercial Real Estate?

Real estate is categorized into various types, with commercial and residential real estate being the main ones. Overall, commercial real estate is any property that generates revenue through rental income or capital gains. Understandably, this is a broad categorization that covers various property types, including offices, retail stores, warehouses, shopping centers, and even residential duplexes.

So, what exactly is commercial real estate, and what does it entail for investors? Here is a brief overview of the various commercial real estate property classes, investment strategies, and the pros and cons of investing in this niche.

The 4 Commercial Real Estate Classes

Commercial real estate properties are categorized into the following five classes:

·         Office

Office buildings come in various types and sizes, from simple office parks to grand skyscrapers. Interestingly, they are categorized into Classes A, B, and C, depending on factors such as age, space, location, aesthetics, and quality of infrastructure.

·         Retail

Retail real estate comprises retail property designed for conducting business. The most common retail property types include restaurants, malls, hotels, resorts, and healthcare facilities.

·         Industrial

Industrial real estate comprises large properties designed to accommodate industrial operations, such as manufacturing. They are categorized into four types, including heavy manufacturing, light assembly, bulk warehouse, and flex industrial properties.

·         Multi-Family

Five or more residential real estate properties owned by a single entity qualify as commercial real estate. Except for single-family homes, multi-family properties cover various types, including apartments, condos, townhomes, and co-ops. Moreover, they are categorized into Classes A, B, and C, depending on factors such as age, location, and infrastructure quality.

Investing in Commercial Real Estate

Commercial real estate is a potentially lucrative niche for investors. Fortunately, there are various investment strategies that high-net-worth investors and investors on a budget can utilize, including the following:

·         Direct Investments

Direct investment entails owning and operating real estate property as a landlord. You can develop the property from scratch or buy an existing property. However, direct investment requires a lot of money, limiting it to high-net-worth individuals. Moreover, it requires a good understanding of the industry, including commercial property laws, although landlords can hire property management companies.

·         Crowdfunding

Crowdfunding involves a group of like-minded investors pooling their money to invest in commercial real estate. Besides investors, the group can also include real estate professionals, such as property managers and contractors, to handle logistics. Moreover, investors can be passive or actively participate in the property’s management.

·         Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are companies that actively invest in real estate by acquiring properties and selling or leasing them out. The companies can be publicly traded, meaning that you can buy their shares on stock exchange markets. Notably, REITs share 90% of their profits with their investors. Overall, investing in a REIT is one of the cheapest and easiest ways of investing in real estate.

·         Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are like mutual funds that invest in real estate securities, such as REIT stocks. They are publicly traded companies, so you can invest by buying their shares on stock exchange platforms.

Pros & Cons of Investing in Commercial Real Estate

Investing in commercial real estate has its advantages and disadvantages, including the following:

Pros

• Lucrative Returns – Commercial real estate properties are in short supply and have a high demand, making them valuable. To this end, the leasing rates can be substantial, especially for properties located in prime locations.
• Stable Income – Commercial property leasing contracts usually run from one to ten years, guaranteeing a stable income flow. Notably, many businesses prefer maintaining their locations for consistency and stability.
• Capital Appreciation – Commercial real estate property increases in value over time when you keep it properly maintained and up to date. To this end, you can make huge returns by holding the property and reselling it.

Cons

• Strict Regulations – Commercial real estate properties are managed under strict laws and regulations that vary from one jurisdiction to another, and breaching them can warrant considerable fines.
• Tenant Turnover Risks – Bad economic times can cause a high tenant turnover rate, leaving properties vacant. It is also worth noting that tenants’ preferences and requirements vary, necessitating costly refurbishments.
• Illiquidity – Commercial properties move slower than residential properties on the real estate market, making illiquidity a potential problem, especially for direct investors.

Conclusion

Overall, any property that you can make money from through leasing or holding and then selling qualifies as commercial real estate. Commercial real estate investments can be lucrative, and some investment strategies are quite easy and affordable.