Commercial real estate is a kind of residential property that is used only for business purposes or provides workspace, not as a living space. Typically, CRE is leased to tenants that do the income-generating activities. This broad category of real estate can include everything from a shop window to a huge shopping mall.
Main features of the CRE
Commercial real estate is understood as real estate used specifically for conducting business or generating income.
The 4 main classes of commercial real estate are
- office space;
- industrial;
- rent for several families;
- retail.
Commercial real estate provides rental income for investors. And investments in commercial real estate usually require more complex and large funds than in residential real estate.
Public Real Estate Investment Trusts (REITs) are an effective way for individuals to indirectly invest in commercial real estate.
The Basics of Commercial Real Estate
Commercial real estate comprises the two primary categories of real estate property. Commercial real estate is used only in commerce. The multi-unit rental properties as residences for tenants are classified as a commercial activity for the landlord.
Individual categories may also be further classified. Office space is often characterized as class A, B, or C.
In other words, Class A represents the best buildings in terms of aesthetics, age, quality of infrastructure, and location.
Class B is usually older and not as competitive—as Class A buildings. Investors often target these buildings for restoration.
Class C buildings are the oldest, typically over 20 years old, located in less attractive areas, and need maintenance.
Commercial Leases
Some businesses own the buildings they occupy. However, commonly, commercial property is leased. A single investor or group of investors owns the building and collects rent from each business that operates there. Commercial lease rates are customarily quoted in annual rental pounds per square foot. Subsequently, residential real estate rates quote as an annual sum or a monthly rent.
There are 4 primary types of commercial property leases, requiring different levels of responsibility from the landlord and the tenant.
1)A single-net lease makes the tenant responsible for paying property taxes.
2)A double-net (NN) lease makes the tenant responsible for paying property taxes and insurance.
3)A triple-net (NNN) lease makes the tenant responsible for paying property taxes, insurance, and maintenance.
4)Under a gross lease, the tenant pays only rent, and the landlord pays for the building’s property taxes, insurance, and maintenance.
the Management of Commercial Real Estate
Owning and maintaining leased commercial real estate requires full ongoing management from the owner. Property owners usually employ a commercial real estate management firm to help them find, manage, and retain tenants, oversee leases and financing options, and coordinate property upkeep and marketability.
Often the landlord must are forced to keep a balance between maximizing rents and minimizing vacancies and tenant turnover.
Does it worth Investing in Commercial Real Estate
Investing in commercial real estate can be very moneymaking and serve as a hedge against the global crisis. Investors actually, can make money through property appreciation when they sell, but most returns come from tenant rents.
Direct Investment
If you use direct investments, you become a landlord through the ownership of the physical property. The best suited for direct investment in commercial real estate are those who have a considerable amount of knowledge about the industry or can employ experts that do.
The ideal property should be near an area with a low CRE supply but with high demand. It will give favorable rental rates. The strength of the area’s local economy can also affect the profit of the CRE purchase.
Indirect Investment
Alternatively, you may invest in the commercial market indirectly through the ownership of various market securities such as Real Estate Investment Trusts (REITs), exchange-traded funds (ETFs), and so on.
Advantages of Commercial Real Estate
The biggest advantage of commercial real estate is attractive leasing rates. In areas where the number of new constructions is limited by land or law, commercial real estate can have awesome monthly cash flows. Industrial buildings typically rent at a lower rate and have lower overhead costs compared to an office tower.
Commercial real estate profits from longer lease contracts with tenants in comparison to residential real estate. This long lease length gives the commercial real estate cash flow stability, as long as long-term tenants occupy the building.
In addition to a stable source of income, commercial real estate can appreciate capital, if the property is well-maintained and kept updated.
Disadvantages of Commercial Real Estate
Rules and regulations are the primary disadvantages for people wanting to invest in commercial real estate directly. For the taxes, mechanics of purchasing, and maintenance responsibilities for commercial properties you will need layers. These requirements change according to state, county, industry, size, zoning, and many other designations.
Another limit is the risk of tenant turnover, especially if an economy expects sudden retail closures to leave properties vacant with little advance notice.
The requirements of one tenant usually should mirror those of previous or future tenants. Because, while real estate, in general, is among the more illiquid asset classes, transactions for commercial buildings tend to move especially slowly and if you should change the space for new tenants needs, it comes much longer and costly.