Commercial Real Estate

Commercial real estate is a type of property that is exclusively used for a business office or business purposes, and is generally leased to individuals for their business. Examples of commercial real estate include office spaces, restaurants, strip malls, hotels, and convenience stores.

Real estate in the commercial space is advantageous in its ability to lead to income streams for investors, as well as capital appreciation. Investment in commercial real estate requires larger sums of money compared to investing in residential real estate. It should be noted that investing in commercial real estate requires knowledge and expertise regarding the commercial real estate market.

What is included in commercial real estate?

Leases for commercial real estate are negotiated between the owner and the leaser (i.e., business owner). The owner of the property collects the rent for each business that occupies their commercial real estate property. Rates for commercial properties are typically quoted in yearly sums based on square footage.

This is in contrast to residential properties, which typically quote rent on a monthly sum. Commercial leases may extend from one year to ten years or more. In general, retail and office spaces will typically average five to ten year leases.

Commercial leases are divided into four types: single net leases, double net leases, triple net leases, and gross leases. In a single net lease, the tenant holds full responsibility in paying property taxes. Double net leases require the tenant to pay insurance and property taxes. Triple net leases require tenants to pay maintenance, insurance, and property taxes. In a gross lease tenants are required to pay rent only, while the owner pays maintenance fees, insurance costs, and property taxes.

What are the different types of commercial real estate?

There are six different types of commercial real estate:

Office

Office properties are typically labeled as suburban or urban. Suburban office buildings are located outside of cities, are typically smaller than urban office buildings, and are usually located within office parks. Typically, urban office properties are located in large cities. Urban office spaces can include high-rise and skyscraper buildings.

Commercial real estate offices are divided into three classes: class A, class B, and class C. Class A include the highest quality buildings on the basis of infrastructure, location, aesthetics, and age. Class B properties are typically older and have less competitive pricing. Class C properties are typically over 20 years in age, need maintenance or restoration, and are located in less attractive areas.

Industrial

Industrial spaces are used for industrial operations for one or more tenants. Industrial spaces are typically located on the outskirts of urban centers, typically along major thoroughfares and transportation routes. These buildings are typically low-rise and may make up an industrial park of many buildings.

There are four types of industrial buildings: heavy manufacturing, bulk warehouse, light assembly, flex industrial. Heavy manufacturing buildings are customized to hold machines that tenants use in the manufacturing process of services and goods. Bulk warehouses are buildings that are typically used as distribution centers. Light assembly properties are generally used for storage and product assembly. Flex industrial properties are versatile properties that are used as both office spaces and industrial spaces.

Hotel

Hotel properties include independent or flagged hotels (i.e., part of a major hotel chain). Further, they are separated into six different categories including boutique, full service, limited service, extended stay, casino, and resort.

Multifamily

Multifamily properties include apartments, condominium buildings, town homes, and co-op buildings.

Retail

Retail properties include restaurants and other retailers. They may be single use, standalone, or multi-tenanted.

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