Commercial real estate (CRE) is a term you regularly hear. But do you know what actually qualifies as commercial real estate?
Broadly speaking, CRE is property used exclusively for business purposes. In other words, you provide a workspace rather than a living space and this commercial space is often leased to a tenant.
So, commercial real estate covers a vast range of property types, from hotels to office space, to coworking spaces and restaurants, malls and single stores.
Classes of Commercial Real Estate
Depending on a building’s function, commercial real estate can be categorized into five areas. These include office, retail, industrial, multifamily, and special purpose.
The retail sector generally covers retailers and restaurants. If you own a mall, then you will likely have a multi-tenant lease where you rent space to different vendors.
Single-tenant buildings can include large commercial centers with national chains (like Walmart or Best Buy) or smaller “pad” sites that may exist in a mall.
Multifamily covers a range of residential real estate (except single-family occupation), including apartments, co-ops, condos, and townhouses.
Industrial buildings are usually categorized into heavy manufacturing, light assembly and bulk warehouses, depending on their function.
Special purpose could include hotels or any other real estate that doesn’t fall into the above categories.
Let’s look at office space and its specific subcategories in a little more detail.
Office space can be urban or suburban, depending on the location of the property. Urban offices are found in inner-city business districts and are usually large high-rise properties. Suburban offices can be the same in terms of square footage, but have room to sprawl outside of the denser city centers and are often found in low-rise office parks.
You may rent out your space to one tenant (single-tenant office property) or multiple tenants (multi-tenant office property). Offices are also ranked into three subcategories, depending on their location, age and condition, amenities, and aesthetics.
- Class A: prestigious buildings, in a prime location with LEED certification, ample amenities, distinctive architecture, and top-of-the-line tenant services.
- Class B: well-maintained buildings, located in a central business district with average rental rates, quality tenants, and solid building systems.
- Class C: aged buildings in less desirable locations where renovation is required, rental prices are low and amenities, technology, and infrastructure are somewhat limited.
Every piece of commercial real estate needs investment. Cash outflows could include the down payment (initial investment), operating expenses, taxes, mortgage payments (or liens), capital expenses, tenant leasing costs, and costs upon sale.
But you can also receive a good rate of return by generating cash from your rent (or lease), operating expenses, amenity fees, and proceeds from the sale. You may also receive tax benefits and credits.
Beyond the financial incentives, a career as a commercial real estate broker also has plenty of benefits. Click here to see if you’d be successful as a commercial real estate broker.