Commercial Real Estate Definitions and Terms
The foundation of a successful career in commercial property is a solid understanding and appreciation of commercial realty. This includes knowing what commercial realty is, how it can be an investment option to residential realty, and the various commercial properties.
What is Commercial Real Estate Property?
A property with the potential to profit via capital gain or rental income is commercial real estate. Commercial property could be anything, from an office building to residential duplexes or even a warehouse or restaurant. It's considered a commercial property if you make money by leasing it or keeping it and reselling.
Difference Between Investment Property and Residential Property
Commercial real estate has more operating expenses and higher property taxes than residential properties, but the potential return on investment is higher. Using a net operating income calculator, you can see how much profit you make. In addition, a triple net lease allows you to take on the financial responsibility for real estate taxes, maintenance, and insurance.
Commercial real estate is different from residential real estate in that you can't usually live on the property. The upside to this is working with business owners instead of directly with renters. In addition, renters who are income-producing tenants will be more likely to adhere to their lease terms and pay rent on time. Additionally, residential real estate will have tenants requiring functional space to live, which will cost more to maintain.
Types of Commercial Real Estate Property
There are two main types of office buildings: suburban and urban. Urban office buildings can be found in large cities. They include skyscrapers, high-rise properties and may cover as many as a few hundred thousand square feet. Suburban office buildings tend to be smaller and are sometimes located in office parks.
Multi-tenanted and single-tenanted office buildings are possible. Many of these buildings can also be built to suit. You can also rank them in three tiers: Class B, Class B, and Class C. This is explained by the Building Owners and Managers Association International.
Class A Office
These buildings are highly sought-after and have rents above the average area. In addition, these buildings have an exceptional market presence and high-quality standard finishes.
Class B Office
Many buildings can be rented to various users. Rents are in the average range for this area. The area's building finishes are good to excellent. The building's finishes are good to perfect for the site. Systems are adequate but not comparable to Class A.
Class C Office
Tenants looking for functional space in buildings that are competing with other buildings. Rents are below the area average. This space is home to a sub-sector called medical office buildings.
Retail properties house the restaurants and retailers we visit. These properties can be multi-tenant (often having a lead tenant or anchor that drives traffic to the property) or standalone, single-use buildings.
Complexities exist in the retail sector. For example, the type of shopping center dictates the dimensions, concepts, styles, number of tenants, and trade area.
One-tenant buildings are big-box centers with a national chain such as Target, Walmart, Best Buy, or Dick's Sporting Goods. Pad sites are single-tenant buildings within a shopping center, including a bank, restaurant, or drugstore.
Industrial buildings are used to house industrial operations and are often located far from urban centers, particularly along major transport routes. You can also group low-rise buildings into industrial parks. There are four types of properties:
Heavy manufacturing: These buildings can be customized, and machinery manufacturers must operate them to produce goods and services.
Light assembly: These can assemble or store products, but they are not as customizable.
Bulk warehouses: These properties can be large and used as distribution centers.
Flex industrial: These properties combine industrial and office space.
R&D (research and development) facilities are a highly specialized industrial type.
Multifamily includes all residential real estate other than single-family. This includes apartments, condos, and co-ops, as well as townhomes. Multifamily properties can be classified similarly as office buildings into three classes: Class A, Class C, and Class B.
Splitting apartment rental buildings into multiple types is a common practice. So Freddie Mac has divided them into six distinct buckets.
High-rise: A building with nine floors or more and at least one elevator.
Mid-rise: A multistory building that has an elevator. Usually found in urban areas.
Garden-style: One, two, or three-story apartment building built in a garden-like environment in a suburban, rural or urban setting. Buildings may or may not include elevators.
Walk-up: A building with four to six stories and no elevator.
Manufactured housing communities: This is a community where the operator leases ground spaces to owners of manufactured homes.
Multifamily properties that are primarily used for particular purposes, such as student housing or senior housing, can be multifamily properties of any type that target a specific population segment.
The hotel sector includes establishments that provide accommodations, meals, or other services to tourists and travelers. Flagged hotels are either independent (boutique) or part of major chains like Sheraton or Marriott. Real Capital Analytics divides them into six distinct categories.
Limited service: This hotel does not offer room service, on-site restaurants, or concierge services.
Full-service: Offers room service and on-site dining.
Boutique: This hotel is located in a resort or urban area and offers full-service amenities. It has fewer rooms than a national chain.
Casino: Includes a gaming component such as slot machines or video poker.
Extended stay: Limited service, with fully-equipped kitchens in guest rooms. Larger rooms are available for more extended stays.
Resort: A full-service resort with large amounts of land in a familiar location like Hawaii or Orlando. It also has an attached golf course, waterpark, or amusement area.
Commercial real estate investors may own particular real estate, but it doesn't fit into any of these sectors. For example, amusement parks, churches, and self-storage are all examples of special-purpose facilities.
Why Commercial Real Estate Matters
Companies can efficiently conduct their daily operations and serve customers from commercial real estate. Companies lease commercial real estate to ensure cost-effectiveness and flexibility.
REITs, which are real estate investment trusts, are more often made up of commercial real estate property assets than residential real estate.
You may be surprised at the potential profitability of commercial real estate property. McDonald's (NYSE: MCD), the most well-known fast-food chain globally, makes most of its profits through its real estate assets and not food. McDonald's is the world's most valuable company, thanks to its extensive global network of top locations.