PROPERTIES
- INDUSTRIAL
- OFFICE
- MULTI-FAMILY
- APARTMENTS
- LAND
- ​​​​​​​SPORTS & ENTERTAINMENT​​​​​​​
- RETAIL​​​​​​​ - SUB TYPES:
- HOTELS AND RESORTS
- STRIP MALLS
- RESTAURANTS
- HEALTH CARE FACILITIES
PROPERTY CLASSES
- CLASS A: They represent the best buildings in terms of aesthetics, age, quality of infrastructure, and location.
- CLASS B: These Buildings are usually older and not as competitive price-wise as class A buildings. Investors often target these buildings for restoration.
- CLASS C: These buildings are the oldest, usually more than 20 years of age, located in less attractive areas, and need of maintenance.
LEASE TYPES
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Gross lease: The landlord is responsible for operating expenses, such as taxes, utilities, and insurance.
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Net lease: The tenant is responsible for operating costs, such as taxes, utilities, and insurance. There are three types of net leases:
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Single net lease (N) The tenant pays a base rent and a portion of the property tax.
- Double Net (NN) The tenant pays a base rent, a portion of the property tax, and a portion of the property insurance.
- Triple Net (NNN) The tenant pays a base rent, a portion or all of the property tax and insurance, and common area maintenance.
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Modified gross lease The landlord is responsible for insuring the property and maintaining common areas, but the tenant is responsible for utilities, cleaning, and maintenance of individual units.
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Percentage lease The tenant pays a base rent plus a percentage of the business's profits.
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Variable lease The lease changes according to certain conditions, such as index leases and graduated leases.
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Absolute Net Also known as a "bondable lease", the tenant is responsible for paying rent, expenses, and repairs to the building, regardless of the building's condition.
- Representation When drafting and negotiating lease terms, it's a good idea to consult a tenant representative broker and legal professional.
CRE LEASING
Some businesses own the buildings that they occupy. However, the more typical case is that the commercial property is leased. Usually, an investor or a group of investors owns the building and collects rent from each business that operates there. Commercial lease rates the price to occupy a space over a stated period are customarily quoted in annual rental dollars per square foot. Conversely, residential real estate rates quote as an annual sum or a monthly rent. Commercial leases will typically run from one year to 10 years or more, with office and retail space typically averaging five- to 10-year leases. This can be contrasted with more short-term yearly or month-to-month residential leases.
MANAGING CRE
Owning and maintaining leased commercial real estate requires full and ongoing management by the owner. Property owners may wish to 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. The specialized knowledge of a commercial real estate management company is helpful, as the rules and regulations governing such property vary by state, county, municipality, industry, and size. The landlord must often strike a balance between maximizing rents and minimizing vacancies and tenant turnover. Turnover can be costly for CRE owners because space must be adapted to meet the specific needs of different tenants—for example, if a restaurant is moving into a property once occupied by a yoga studio.
HOW INVESTORS MAKE MONEY IN CRE
Investing in commercial real estate can be potentially lucrative and serve as a hedge against the volatility of the stock market. Investors can make money through property appreciation when they sell, but most returns come from tenant rents.
DIRECT INVESTMENT
Investors can use direct investments where they become landlords through the 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 high-net-worth individual since CRE investing requires a considerable amount of capital.
The ideal property is in an area with low CRE supply and high demand, which will give favorable rental rates. The strength of the area’s local economy also affects the value of the CRE purchase.
INDIRECT INVESTMENT
Alternatively, investors may invest in the commercial market indirectly through either ownership of various market securities, such as real estate investment trusts (REITs) or exchange-traded funds (ETFs) that invest in commercial property-related stocks, or investment in companies that cater to the commercial real estate market, such as banks and Realtors.
ADVANTAGES OF CRE
One of the biggest advantages of commercial real estate is attractive leasing rates. In areas where the amount of new construction is limited by either land or law, commercial real estate can have impressive returns and considerable monthly cash flows. Industrial buildings generally rent at a lower rate, though they also have lower overhead costs compared with an office tower.
Commercial real estate also benefits from comparably longer lease contracts with tenants than residential real estate. This long lease length gives the commercial real estate holder a considerable amount of cash flow stability, as long as long-term tenants occupy the building.
In addition to offering a stable and 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. And, like all forms of real estate, it is a distinct asset class that can provide an effective diversification option to a balanced portfolio.
WHAT IS THE DIFFERENCE BETWEEN CRE AND RESIDENTIAL?
Residential real estate is used exclusively for private living quarters. Commercial real estate refers to any property used for business activities. Types of commercial real estate include hospitals, assembly plants, storage warehouses, shopping centers, office spaces, or any other location for a business enterprise.
IS CRE A GOOD INVESTMENT?
It can be. Commercial real estate can have impressive returns and considerable monthly cash flows, and returns stood up well during the market shocks of the past decade. As with any investment, however, commercial real estate comes with risks.
WHAT ARE THE DISADVANTAGES OF CRE?
Rules and regulations are the primary deterrents for most people wanting to invest in commercial real estate. The taxes, mechanics of purchasing, and maintenance responsibilities for commercial properties are buried in layers of legalese, and they can be difficult to understand without acquiring or hiring specialist knowledge.
THE BOTTOM LINE
Commercial real estate refers to real estate that is used specifically for business or income-generating purposes. It differs from residential real estate because it has the potential to provide rental income as well as capital appreciation for investors. The four main classes of commercial real estate are office space, industrial, multifamily rentals, and retail.
Investing in commercial real estate usually requires more sophistication and larger amounts of capital from investors than does residential real estate, but it can offer high returns. Publicly traded REITs are a feasible way for individuals to indirectly invest in commercial real estate without specialist knowledge of the sector.
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