Commercial Real Estate – Fundamental Terms
What is commercial real estate?
Commercial real estate (CRE) refers to properties meant to generate income. These properties are places where companies conduct business, with the notable exception of multifamily properties and buildings designated for hospitality, which provide living space for residents. Investors typically own the building (or a percentage thereof) and collect rent from each business that operates within the property.
What is a commercial property?
A commercial property is an income-generating type of property — typically structures and/or land designated for business use. This also includes certain types of residential properties with rental units, such as multifamily properties. There are eight different types of CRE:
Multifamily Property: A property with rental units for dwelling, such as apartment buildings, and classified by size: garden, mid-rise and high-rise. These types of buildings are classified as commercial if they have more than five units.
Office Building: A property that provides space for a company and its employees to use for business and, like other structures, is also classified by quality — class A, class B and class C. While they can be urban or suburban, those in the heart of a city’s business district are classified as central business district (CBD). In the suburbs, office buildings are usually comprised of mid-rise structures of 80,000 to 400,000 square feet. They may also be part of a suburban office park with several different mid-rise buildings on a campus.
Industrial Properties: These properties include factories and warehouses, and are grouped into several categories:
warehouse and distribution
manufacturing facilities (i.e. heavy industrial buildings)
Furthermore, “flex” or “flexible” is a special type of industrial property that can have multiple uses that are often combined, including:
research and development
showroom retail sales
small warehouses and distribution centers
Retail: Retail includes anything ranging from a small boutique shop to a large mall. These are divided by the International Council of Shopping Centers (ICSC) into three types of shopping centers:
general-purpose centers (including regional malls, strip malls, etc.)
specialized-purpose centers (including power centers, factory outlets, etc.)
limited-purpose property (airport retail stores)
Another special type of retail properties are outparcels.
Hotels: Hotels are used to temporarily provide shelter to tourists and are divided into the following categories:
Mixed-use: A mixed-use property can be a combination of the properties listed above. The three types are:
vertical mixed-use development
horizontal mixed-use development
mixed-use walkable area
For example, in a vertical mixed-use development, there could be an office space, a retail store, or a doctor’s office on the ground floor and apartment units on the top floor. Likewise, in a horizontal mixed-use structure, there could be an apartment building situated next to a grocery store.
Land: This is land for investment and includes greenfield/agricultural land, infield, and brownfield land.
Special Purpose: This includes properties that do not fall into any of the above categories, such as stadiums, theaters, amusement parks, storage facilities and so on.
What is commercial property investment?
A commercial property investment is when an individual or group of individuals commits money to a for-profit business or property with the expectation of generating a return on investment (ROI) based on the profitability of the business. This can be an individual who invests in a multifamily complex or a group of investors who invest together in an office building. The two principal considerations that investors look for when they buy CRE are to generate income or to increase the value of the property.
What is a commercial property owner?
A commercial property owner is the entity or individual who owns either the entire property or is a member of a group of investors. Among the many diverse types of commercial property owners with various types of investment portfolios, there are:
Mom and Pop Investors: Proprietors with one particular property as their main investment, which is usually a small business.
Family Investors: Families who have built up portfolios with several small- to mid-size properties over time.
Real Estate Developers: Owners who normally buy and develop office, residential, hotel, retail, and mixed-use properties.
Institutional Investors: These types of investors can range in size and are looking for a steady return on investment (ROI) over a certain period of time (such as two years). Some examples include large corporations, real estate investment trusts (REITs), pension funds, endowment funds, insurance companies and commercial banks.
What are the differences between commercial and residential real estate?
While residential real estate is property designated to provide living space, commercial real estate is a place that is designated for businesses, with the notable exception of multifamily and buildings used for hospitality, such as hotels, motels and so on. Additionally, despite multifamily properties providing living space for residents, these are included in commercial real estate because they are operated for profit by owners/investors.
Besides the usage of the property, commercial real estate usually:
requires a larger investment up front
often has more than one owner
is subject to different types of taxation, legislation, and transfers of title.