What Is Commercial Real Estate?
Commercial Real Estate (CRE) is simply defined as any property owned to produce income. From an investment point of view, commercial real estate encompasses any kind of property, including land, which brings or has the potential to bring income. From a business point of view, commercial real estate is any offering of office, retail, industrial, medical, hospitality, and other commercial space that can be leased (and sometimes bought) for the use of the business.
Commercial property includes office buildings, industrial property, medical centers, hotels, malls, retail stores, farm land, multifamily housing buildings, warehouses, and garages. In many states, residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes.
Commercial real estate office properties include single-tenant buildings, small professional buildings, skyscrapers, and everything in between. Buildings are classified into three categories: Class A, Class B, or Class C.
Class A buildings are the best of the best. They are often newer buildings with state-of-the-art infrastructure, but may be old buildings that have been extensively renovated. Class A buildings are usually in prime locations with good access, and are professionally managed.
Class B buildings are often targeted by investors, because while they may be older, they have the potential for a high return on investment through renovation and improvements. These buildings are usually well-maintained and well-managed, but infrastructure may need some capital investment.
Class C buildings are older, poorly located, and often in need of extensive renovation and updates to out-of-date infrastructure. They usually have lower rental rates to compensate for the lower quality office space. Class C buildings are often vacant longer than higher-classed buildings, and can be targeted for redevelopment opportunities.
As location is the real estate watchword, office buildings are often defined by neighborhood when listed, rather than by building features. An office tower in San Francisco's Financial District will be prized for its superior access, prestigious corporate address, and proximity to neighborhood amenities like fine dining and business services. An artist loft in New York might prefer SoHo to the central business district (CBD), due to the neighborhood's quaint architecture and artsy history.
Retail or restaurant sites can be freestanding, like a bank or restaurant building. They are often found on the lower floors of office buildings or multi-family structures, especially in urban areas. Retail offerings abound in strip malls and neighborhood centers. Businesses can pinpoint their ideal retail space from any of these options, but investors will be drawn to malls and retail centers, which have many tenants and therefore are a better risk.
Industrial properties range from smaller sites that are often termed "flex" space or "R&D" properties; to warehouses; to large, heavy manufacturing sites. These spaces are often listed with clear height specifications, or the height from the floor to the lowest-hanging overhead obstruction, which could be 14 feet in a small building to more than 40 feet in a large industrial space. Businesses seeking industrial space also look for dock types and availability. Grade level docks are at street level for drive-in convenience; semi-docks are 24" for a pickup or delivery truck; and a full-dock is 48 inches for a semi-truck.
An apartment fourplex or larger is considered commercial real estate for an investor. Sprawling apartment complexes, high-rise condominium units, and smaller multi-family units are all CRE investments. Leases on multi-family structures are shorter-term than office and retail units, however, providing less long-term stability than office building investments.
Investors usually favor land that is in the path of future development. Greenfield land is undeveloped land--pasture just waiting to be paved. Urban infill is usually land that was once developed, and now is vacant. Brownfield land describes previously developed property that is often environmentally compromised, requiring significant clean-up to be utilized. Brownfield and urban infill land are more highly prized by environmentally-conscious investors.
Leisure (hotels, public houses, sports facilities, etc.) and healthcare (medical centers, hospitals, and nursing homes) could arguably have their own categories, as there are many of these. Other retail offerings include car washes, theme parks, self-storage, bowling alleys, marinas, theaters, and funeral homes. All of these fall into the CRE category for both space-seeking businesses and for investors.
These six basic types of commercial real estate can guide your search for the perfect business location, or for the best return on investment.