What Is Commercial Real Estate (CRE)?

Commercial real estate (CRE) is property used for business-related purposes or to provide workspace rather than living space. Most often, commercial real estate is leased by tenants to conduct income-generating activities. This broad category of real estate c🤡an include everything from a single storefront to a massive factory or a warehouse.

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 reta💝il and office space, hotels and resorts, strip malls, restaurants, and healthcare facilities.

Understanding Commercial Real Estate (CRE)

Co𝓡mmercial real estate and residential real estate are the two primary categories of the real estate property business.

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.

Commercia𝄹l real estate is typically categorized into four clas♎ses, depending on function:

1. Office space
2. Industrial use
3. 澳洲幸运5官方开奖结果体彩网:Multifamily rental
4. Retail

Individual categories may also be further classified. There are, for instance, differe🌺nt types of re♑tail 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 furthe🔴r 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.

Commercial Leases

Some businesses own the buildings that they occupy. More commonly, 澳洲幸运5官方开奖结果体彩网:commercial property is leased. An investor or a group of investors owns the ಞbuilding and collects rent from each busi🍒ness that operates there.

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

Commercial leases typ📖ically 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, ℱwhere yearly or month-to-month leases are common.

There are four primary types of 澳洲幸运5官方开奖结果体彩网:commercial property leases, each requiring different le💟vels of respons𓆉ibility from the landlord and the tenant.

• A 澳洲幸运5官方开奖结果体彩网:single net lease makes the tenant responsible for paying property taxes.
• A 澳洲幸运5官方开奖结果体彩网:double net (NN) lease makes the tenant responsible for paying property taxes and insurance.
• A 澳洲幸运5官方开奖结果体彩网:triple net (NNN) lease makes the tenant responsible for paying property taxes, insurance, and maintenance.
• Under a 澳洲幸运5官方开奖结果体彩网:gross lease, the tenant pays only rent, and the landlord pays for the building’s property taxes, insurance, and maintenance.

Managing Commercial Real Estate

Owning an💃d maintaining leased commercial real estate requires ongoing management by the owner or a profesಌsional management company.

Property owners may wish to employ a commercial real estate management firm to help them𝔉 find, manage, and retain tenants, oversee leases and financing options, and coordinate property upkeep. Local knowledge can be important as the rules and regu𝔉lations governing commercial property vary by state, county, municipality, industry, and size.

The landlord must often strike a balance between 澳洲幸运5官方开奖结果体彩网:maximizing rents and minimizing💫 vacancies and tenant turnover. Turnover can be costly because space must be adapted to meet the specific needs of different tenan𒅌ts—for example, if a restaurant is moving into a property formerly occupied by a yoga studio.

How Investors Make Money in Commercial Real Estat♚e

Investing in commercial real estate can be lucrative and can serve as a hedge against the 澳洲幸运5官方开奖结果体彩网:volatility of the stock market. Investors can make money through property 澳洲幸运5官方开奖结果体彩网:appreciation when they sell, but moಞst returns come from tenant rents.

Direct Investment

澳洲幸运5官方开奖结果体彩网:Direct investment in commercial real estate entail𝓀s becoming a landlord through ownership of the physical property.

People best suited for direct investment in commercial real estate are those who either have a considerable amount of knowledge about the industry or can employ firms that do. Commercial properties are a high-risk, high-reward real estate investment. Such an investor is likely to be a 澳洲幸运5官方开奖结果体彩网:high-net-worth individual&nbꦍsp;since the purchase of commercial real estate requires a considerable amount of capital.

The ideal property is in an area with a low supply and high demand, which will give favorable rental rates. The ﷺstrength of the area’s local economy also affects the value of the purchase.

Indirect Investment

Investors can invest in the commercial real estate market indirectly through ownership of securities such as 澳洲幸运5官方开奖结果体彩网:real estate investment trusts (REITs) or 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs) that invest i꧅n commercial propeꦫrty-related stocks.

Exposure to the sector also derives from investing in companies that cater to the commercial ꧑real estate market, such as banks and realtors.

Advantages of Commercial Real Estate

One of the biggest advantages of commercial real estate is its attractive leasing rates. In areas where new construction is limited by a lack of land or restrictive laws against development, commercial real estate can have impressive returns and considerable monthly 澳洲幸运5官方开奖结果体彩网:cash flows.

Industr🦂ial buildings generally rent at a lower rate, though they also have lower overhead cos💫ts compared with an office tower.

Other Benefits

Commercial real estate benefits from comparably longer ൩lease contracts with tenants 💖than residential real estate. This gives the commercial real estate holder a considerable amount of cash flow stability.

In addition to offering a stable 𝕴and rich source of income, commercial real estate offers the potential for capital appreciation as long as the property is well-maintained and kept up to date.

Like all forms of real estate, commercial space is a distinct asset class that can provide an effective 澳洲幸运5官方开奖结果体彩网:diversification option to a balanced portfolio.

Disadvantages of Commercial Real Estate

Rules and regul๊ations are the primary deterrents for most people wanting to invest in commercial real e🧔state directly.

The taxes, mechaไnics of purchasing, and maintenance responsibilities for commercial properties are buried in layers of legalese. These requirements shift according to state, county, industry, size, zoning, and many other designations.

Most investors in commercial real estate either hav𝕴e specialized knowledge or employ peopl💯e who have it.

Another hurdle is the risks associated wi🌠th tenant turnover, especially during economic downturns when retail closures can leave properties vacant with little advance notice. 

The building owner often has to adapt the space to accommodate each tenant’s specialized trade. A commercial property with a low vacancy but high tenant turnover may still lose money due to tꦫhe cost of renovations for in♏coming tenants.

For those looking to invest⛎ directly, buying a commercial property is a much more costly proposition than a residential prope💜rty.

Moreover, while real estate in general is among the more illiquid of asset classes, transactions for commercial buildings tend to move especially slow꧅ly.

Commercial Real Estate and COVID-19

The global COVID-19 pandemic beginning in 2020 did not cause real estate values to drop substantially. Except for an initial decline at the beginning of the pandemic, property values have remained steady or even risen, much like the stock market, which recovered from its dramatic drop in the second quarter (Q2) of 2020 with an equally dramatic rally that ran through much of 2021.

This is a key difference between the economic fa✤llout due to COVID-19 and what happened a decade earlier. It is still unknown whethe🐲r the remote work trend that began during the pandemic will have a lasting impact on corporate office needs.

In any case, the commercial real estate industry has still yet to fully recover. Consider how American Tower Corporation (AMT), one of the largest United States REITS, was priced at roughly $250 per share in June 2022. Fast-forward one year, the REIT traded at roughly $187 per share in June 2023. At the end of June 2024, it was at about $194.

Commercial Real Estate Outlook and Forecasts

After major disruptions caused by the pandemic, commercial real estate is attempting to emerge from an unclear 𒅌state.

In a mid-year update released in May 2024, JPMorgan Chase concluded that the multifamily, retail, and industrial sub-sectors of commercial real estate remain strong despite interes🅰t rate increases.

However, it noted that office vacancies were rising. Vacancies nationwide stood at a record-breaking 19.6% in the final quarter of 2023.

The Bottom Line

Commercial real estate ha🔜s the potential to provide steady rental income as well as capital appreciation for investors.

Investing in commercial real estate usually requires larger amounts of capital than residential real estate, but it can offer high returns. Investing in publicly traded REITs is a reasonable way for individuals to indirectly invest in commercial real estate wi🐬thout the deep pockets and specialist knowledge needed by direct investors in the sector.