Commercial real estate is land on which a business can be operated in order to generate income. Unlike residential real estate, which can only be used as a primary residence or for rent, commercial real estate is legally defined as land intended to generate income for a business. Commercial real estate income may come from collecting rents from companies or individuals renting out the space, or from the owner running a business on the property himself.
What is commercial real estate?
Local laws determine which areas are for commercial use and which are for residential use, through a process called zoning. Residential areas include dwellings for single or multiple families and have minimal traffic and noise. Commercial areas allow for a wider range of building types and business activities that can otherwise disrupt daily life if not separated from residential areas.
Buildings in a business park must house one or more companies. In urban settings, this can take the form of large office buildings rented by many different companies, or facilities that charge rent from multiple customers – such as B. self-storage or medical practices. Commercial properties in suburban areas often consist of a single store per building, such as B. a car wash or a restaurant. In both cases, the owner of the property receives reliable rental income or can choose to run their own business.
Types of commercial real estate
Office buildings contain workspaces—generally corporate or professional businesses (as opposed to retail or manufacturing). Office spaces are usually divided into three classes.
- Class A is the highest classification for office buildings. Class A office buildings are typically located in a high demand area, are of modern design and may have been recently built or completely remodeled, with first class infrastructure and a variety of services and amenities attractive to businesses. These buildings offer the advantage of luxury, location and new construction.
- Class B is on the border between Class A and Class C buildings: they represent a balance between cost and quality. These can be in areas of modest demand. Its structure and interior are in good condition, but not the most lavish or modern.
- Class C office buildings may be the cheapest to purchase but often end up on the lower end of the spectrum in terms of finishes, business needs and profitability. They may be on the outskirts of a city or suburban business district, have very few amenities, and may require more extensive interior and exterior renovations.
Industrial buildings can range from heavy industry to light assembly plants; They can also include warehouse and bulk storage structures. This is one of the most regulated forms of real estate. Industry zoning rules can be very complex depending on the type of industry involved: oil refineries, for example, cannot be built in every area designated for industrial use. Depending on the city and state regulations as well as the area of interest, industrial use for commercial real estate can be more or less feasible.
Commercial real estate used for retail covers anywhere you buy and pay for goods or services, including:
- shopping centers and malls
- restaurants, pubs
- hair salons and spas
- department stores and fashion boutiques
- Gyms, sports centers
- Any other establishment where you might spend money
Rental of apartment buildings
While commercial real estate is most often contrasted with residential real estate, apartment buildings (multi-family houses, townhouses, assisted living units etc.) are a kind of hybrid: yes, people live in them, but they constitute a business and generate income for the individual or legal entity that owns them. Basically, buildings or groups of buildings with five or more residential units are actually referred to as commercial and not residential real estate. Buildings with one to four rental units generally still fall under the residential property classification – although they are considered investment properties in financial circles (just to add to the confusion).
Because of this, local zoning laws often go further than just allocating areas for residential or commercial use, often further dividing them into single-family or multi-family dwellings. For this reason, commercial development of new apartment complexes is often concentrated in specific neighborhoods or areas of a community.
How can you invest in commercial real estate?
Direct or active investment in commercial real estate means owning and managing a property yourself. You can invest in real estate directly by working with a real estate agent or attorney to research options, select a property and make an offer. You usually need to have significant assets to finance your purchase or work with a lender that specializes in commercial real estate loans. You can also structure a syndication around a specific commercial investment opportunity to raise funds from an entire group of investors.
If managing a building or structure is too much work or risk for your preferences, you can also invest in real estate indirectly: not by buying physical property, but by buying an interest in a company or partnership that does so . People who participate in this way are known as passive real estate investors. You participate in the income and profits of the property, but do not make any decisions about it.
A real estate investment trust (REIT) is essentially a publicly traded company that invests in real estate: you buy shares in it like you would any stock. REITs are available for all types of real estate, so you can limit your investment choices to just Class A buildings, for example.
Besides REITs, you can invest indirectly through various real estate partnerships and crowdfunding platforms. You can invest capital in a syndication or choose to purchase shares of an investing fund to diversify your capital across multiple asset classes for even lower overall risk. Passive investors are commonly considered limited partners – “restricted” in that they don’t participate in management, just investing money – but they can also become partners in a joint venture or engage in private money lending (although the latter two are less common). ). for commercial investment properties).