What is Commercial Real Estate?
Commercial real estate (CRE) is property that is used exclusively for business-related purposes to either conduct business activities or provide workspace. Due to the large property sizes, these establishments are usually leased to tenants for business activities. Example of commercial properties include storefronts, shopping centers, office buildings, restaurants, healthcare facilities, hotels and warehouses.
Commercial Real Estate Categories
There are four primary categories of commercial real estate that are used by the industry to identify properties:
- Office Space
- Industrial Use
- Multi-family Rental
These four categories can then be broken down into classes. For example, class A properties are visually aesthetic and new in age whereas class B are typically older and less competitive with price. These classes help investors and tenants determine the quality of the properties. Some licenses and zoning authorities can further break down property types by functional specification.
There are some companies that own the buildings they occupy. However, most of the time commercial property is leased. Typically, an investor group 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) is 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 usually run from 1 – 10 year or more depending on the lease terms.
There are four primary types of commercial property leases, each requiring different levels of responsibility from the landlord and the tenant.
- A single-net lease makes the tenant responsible for paying property taxes.
- A double-net (NN) lease makes the tenant responsible for paying property taxes and insurance.
- A triple-net (NNN) lease makes the tenant responsible for paying property taxes, insurance, and maintenance.
- Under a gross lease, the tenant pays only rent. While the landlord pays for the building’s property taxes, insurance, and maintenance.
Advantages of Commercial Real Estate
There are many advantages of commercial real estate for both investors and tenants. Below is a detail explaining each one:
Attractive Leasing Rates – One of the biggest advantages is attractive leasing rates. In areas where the amount of new construction is either limited by land or law, commercial real estate can have impressive returns and considerable monthly cash flows.
Longer Lease Contracts – 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.
Affordable Access to Commercial Space – As a business owner, having workplace to conduct business is the best way to motivate employees, enable collaboration, manufacture goods, and sell products. Leasing commercial real estate offers an affordable solution to doing business rather than spending a tremendous amount of capital building your business properties. As a renter, commercial real estate allows individuals and families to live in an affordable space when a capital investment for a home may not be available.
Disadvantages of Commercial Real Estate
There are also downsides to investing and leasing commercial real estate. Below are explanations of each:
Rules and Regulations – A major deterrent for most people wanting to invest in commercial real estate directly is strict regulation policies. The taxes, mechanics of purchasing, and maintenance responsibilities for commercial properties are littered with legal barriers. These requirements shift according to state, county, industry, size, zoning, and many other designations.
Increased Risk – Another hurdle is the increased risk brought with tenant turnover, especially relevant in an economy where unexpected retail closures leave properties vacant with little advance notice.
Tenant Leasing – Residents and tenants are subject to making rent payments each month. Once this money is paid is it never seen again. Although the value to the customer is the commercial property, some can view this as throwing money away. Unless the commercial property is out-right owned, commercial leasing can be a burden that comes at a high expense.
Partner with Investment Business Brokers
Investment Business Brokers is a full-service business brokerage and commercial real estate firm focused on building trusted relationships to deliver maximum value to our clients. While IBB is headquartered in Dallas, we serve clients nationwide. If you have any other questions or would like to learn more about our commercial real estate services, call us at 972-266-4525 or fill out our contact form online and we are happy to share our knowledge with you.
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