Breaking Down Commercial Real Estate
What is Commercial Real Estate?
Commercial real estate refers to real property or land that are used primarily for business or investment purposes. Real estate transactions include buying, selling, and leasing. Commercial property can be anything from a small office space to a large industrial complex. A large part of our daily lives is impacted by the commercial real estate industry.
Who is involved in real estate transactions?
Parties involved in commercial sales can be divided into two categories, owner-user or investor. Owner-user refers to someone who both owns and occupies a piece of property. Investors involvement in commercial real estate is for some sort of financial gain. Outside of sales, leasing is another large part of the commercial real estate industry. Leasing is made up of lessors who own property and rent it out, and lessees who temporarily occupy the property.
Types of Commercial Properties
Commercial property can be broken down into several different categories. While many different sub-types exist, we have highlighted the most popular types for owner-users and investors alike.
Offices are often leased out to businesses to function as a space where day-to-day operations take place. Typically, Triple Net leases are the most common for office space, which means the tenant pays all expenses related to their space including taxes, insurance, and utilities. Leases can run anywhere from monthly to 20 years with built-in rent increases for longer terms. For investors, offices tend to be a stable way to generate passive income.
Retail encompasses spaces where customers buy and sell goods. From free standing buildings to malls and shopping centers, there are many retail options. When looking for a space, you want to make sure your business is clearly visible, easily accessible, and in a highly trafficked area. Usually, retail properties have shorter lease terms than offices, but this is offset by higher rents and better returns on investment.
Industrial properties house a variety of uses and are generally situated outside urban areas but touching major transportation routes. A group of low-rise buildings can also be grouped to form industrial parks. Industrial buildings can be utilized for manufacturing, transportation, warehouses, as well as flex buildings. With industrial property, build-to-suit is often used to allow tenants to build to their exact specifications while securing the landlord a long-term tenant.
Mixed-use properties are unique in the commercial real estate industry because they can be utilized for a variety of uses at one time. These types of properties offer a dynamic setting with the ability to live, work, and/or play. The ability to generate different types of revenue streams gives investors flexibility and diversity in a single property. Examples of a mixed-use property would be an apartment complex that features retail on the ground floor or a single space that could be used as office or retail. Mixed-use is a great investment because of the versatility they provide. Industrial properties house a variety of uses and are generally situated
Land is the blank canvas of the real estate world. Commercial land has a variety of uses for developers and owner-users. The future use can be anything a buyer wants as long as it falls within local zoning regulations. Land can be a great, low-hassle investment over time, but does not provide a reoccurring revenue stream. It always appreciates in value given enough time and development in the surrounding area.
Income Producing real estate refers to residential or commercial properties that generate revenue for the owner. Any of the previous categories we have talked about can be labeled as Income Producing as long as they have some sort of income stream. This ranges anywhere from duplexes and apartments, to skyscrapers and industrial complexes. Income producing properties are usually presented with a Capitalization Rate (Cap Rate). A cap rate gives you an idea of how secure your investment is and how much money you can expect to return per year. For example, a property with a lower cap rate is generally a safer investment, but gives lower returns.