Commercial real estate (CRE) is a property that hosts businesses and other income-generating entities. These assets offer workspaces for lease to tenants. CRE requires greater capital investments and earns higher returns than residential assets, especially in promising and in-demand areas.
CRE tenants prefer longer lease terms than residential tenants. They avoid relocations to maintain their businesses. These lease terms mean landlords enjoy stable cash flow from their assets, and some tenants, such as government agencies and healthcare facilities, can offer certainty even in periods of economic turmoil.
Office buildings, retail properties, industrial facilities, multifamily units, and hospitality spaces are the primary types of CRE. Office buildings offer spaces for various entities to lease, and they are of two types: urban and suburban. Urban office buildings are found in cities and include high-rise properties and skyscrapers. Suburban office buildings are smaller in size and are mostly located on the outskirts of major cities. Office buildings can be categorized into classes A, B, and C.
Class A is the most prestigious office space, primarily comprising the newest and best-looking buildings. These assets are found in the best locations, mostly major cities, charge premium rent prices, are professionally managed, and offer high-quality amenities. Class B office buildings are a little older than class A but are professionally managed.
Since most of these assets are found in promising locations, renovations can convert them into class A. Class C buildings are found in less desirable locations, charge the lowest rents, and are old. Their amenities and architectural designs are considered outdated and often require significant renovations to attract tenants.
Retail properties are the spaces that host malls, restaurants, standalone stores, and other retailers. These buildings can be multi-tenant, hosting various retailers, or single-use spaces, mostly taken up by one business, such as banks and supermarkets. The location, consumer behavior, and traffic in the surrounding area determine rental charges for retail property.
Industrial facilities host tenants in the manufacturing, logistics, and distribution sectors. These assets are mostly low-rise buildings found outside urban areas. Some of these assets allow tenants to customize the spaces to fit their operations, and others, referred to as flex industrial, comprise both industrial and office spaces.
Multifamily units, on the other hand, encompass five or more residential assets owned by a single entity. They include apartments, condominiums, and townhouses that generate returns from rental charges. Special-purpose units are a type of multifamily asset that targets a specific demographic, such as senior citizens and students. Last, hospitality spaces host establishments that provide meals and accommodations, including hotels and resorts.
Investors can venture into CRE using the direct or indirect approach. The direct approach involves purchasing commercial assets and this requires significant capital investments and in-depth market knowledge. Most investors work with real estate brokers to identify viable properties to purchase and hire property managers after acquisition to handle the tenants.
The indirect approach involves investing in real estate investment trusts (REITs) and crowdfunding. Corporations set up REITs and pool multiple investors’ funds to acquire property. Investors can contribute any amount of money and own CRE in a hands-free manner. The corporations advertise vacancies, interview tenants, collect rent, oversee maintenance, and ensure the property adheres to legal obligations, such as paying rental income tax and insurance. After collecting rent, investors receive monthly dividends, which are often over 90 percent of the trust’s after-tax profits. Notably, REITs are publicly traded, meaning investors wishing to cash out can do so without hiring real estate agents.
Crowdfunding involves a group of investors contributing funds to purchase CRE. It is a form of online fundraising that splits the cost structure of owning real estate and the associated risks to multiple investors. Similar to REITs, crowdfunding requires low contributions and investors own CRE hands-free.
