Join our community of 30,000+ investors!
Close Popup Icon

September 23, 2019

What Falls Under the Umbrella of Commercial Real Estate?

You know that to take your investment portfolio to the next level, you need to begin investing in real estate. Not only will investing in real estate give you a more diverse portfolio, but since 2000, it has outperformed the stock market as well. The wealthiest have known this for decades, and they have grown their real estate holdings to take advantage of this trend.

But where do you start?

The best way to begin something new is to read about it. You’re in the right place.

Keep reading to learn about commercial real estate. You will learn what types of properties qualify as commercial real estate, and how each type might serve different purposes for your investment portfolio.

What is Commercial Real Estate?

Commercial real estate is any property that is used for business activity. Usually, commercial real estate is in a different category as residential real estate. One exception to this is multifamily dwellings and apartment buildings. Most of the time, anything larger than a four-plex falls under the umbrella of commercial real estate.

How Do Investors Typically Make Money in Commercial Real Estate?

If someone wants to open a nail salon in a suburban community, the business owner will lease a storefront in a strip mall owned by a commercial real estate investor. The owner of the building will collect rent from the nail salon owner as well as the other tenants in the strip mall. Of course, as the investor builds equity in the strip mall, he or she will be able to make a profit when it sells at a later date.

A beginner real estate investor may consider looking into REITs (real estate investment trusts). This will allow you to purchase a portion of large-scale projects, such as shopping malls, apartment buildings, hotels, resorts, and office buildings without doing the heavy lifting yourself.

Types of Commercial Real Estate Investments

Several different sectors make up commercial real estate. Let’s learn about the basic types:

Office Buildings

You may choose to invest in office buildings. Office buildings can be multi-tenanted or have a single tenant. You may want to invest in an office building that is built to suit a specific business. Medical office buildings are usually included in this sector. 

Office buildings are usually divided into three tiers. Class A office buildings offer high-end spaces to premier tenants. They are typically located in a premier location and have exceptional accessibility.

Class B offers a functional space for businesses able to pay moderate rent. The finishes in a Class B office building are not usually as state of the art, and they are located in less popular areas than Class A properties. These properties are generally well maintained and managed and are often the target of real estate investors. 

Class C office buildings provide a space for business tenants who are looking for an office to rent at below the average price in an area. Class C buildings are often vacant longer than buildings in higher categories.

One benefit of investing in office spaces is that tenants may sign long leases. This will make your investment seem more secure, as you will be able to project your future profits.

One concern for investing in office spaces is that the occupancy is dependent on the economy. For example, after the dot-com crash, rent in the Silicon Valley area decreased because of a lack of demand.

Industrial Spaces

There’s something satisfying about the idea of helping a company that manufactures a product. If you invest in industrial spaces, you could lease the area to a heavy manufacturing company that produces machinery or a company specializing in light assembly such as furniture. Some industrial spaces can be easily reconfigured as tenants come and go.

Also included within the industrial space category are warehouses. Bulk warehouses are especially attractive to businesses if they are in areas that can be accessed easily. Like office buildings, industrial spaces usually have tenants with longer lease terms.

Industrial real estate also seems to be dot-com friendly. Businesses are using fewer office spaces because more people are working remotely, but they still need warehouses and distribution centers throughout the country. In fact, some companies are seeking warehouses and fulfillment centers instead of retail spaces.

Retail Spaces

This category of commercial real estate has gone through many different trends throughout the years. From indoor malls to strip malls, these commercial investments usually have anchor tenants that draw customers into the property. An investor usually has smaller retail spaces surrounding the anchor tenant that brings in small businesses like dry cleaners, walk-up restaurants, and pet groomers. Of course, retail space can be a stand-alone unit as well.

There are a lot of benefits of investing in retail spaces. Again, often retail leases are longer than the contracts for other types of commercial properties. Also, the tenant will often cover fixed costs, such as property insurance and utilities. Sometimes, the lease for a retail space includes a percentage rent calculation. So if the tenant is doing well in the space, both the landlord and the tenant earn more profit.

Of course, retail trends and design have changed through the years, and that may affect your revenue from your investment.

Multifamily Housing

Whether you invest in garden apartments or high-rise apartment buildings, you can make a lot of money in multifamily housing.

Freddie Mac classifies multifamily dwellings in different categories:

Everyone needs a place to live, so investing in multifamily housing units is not as dependent upon the economy. You can generate a lot of cash flow, which will reduce the principal of your real estate loan and create equity. When demand increases for apartments in a particular area, you can increase the rent, which forces appreciation for your investment.

As lucrative as multifamily investments are, there are some disadvantages to this type of investment. As neighborhoods change, so does the value of your property. Apartment buildings can also be a competitive industry as your tenants may be attracted to new premises as soon as they appear on the scene.

Hotels

Real estate investors may be attracted to investing in hotels. Whether you build a full-service hotel in a tourist area or a boutique hotel in a quieter neighborhood, you could also enjoy having an extended lease agreement for this type of commercial property. 

Special Purpose Commercial Properties

There are plenty of other specifically-designed properties that real estate investors construct and own. These properties include storage units, car washes, theaters, nursing homes, churches, marinas, bowling alleys, and even theme parks.

Final Thoughts

You may be attracted to a specific type of commercial property. Before you take this big step, it is always prudent to talk with professionals who work in commercial real estate. They will be able to walk you through the pros and cons of each type of investment. They also always have their ear to the ground to learn about investment opportunities for their clients.

 

Want to generate your own wealth with DiversyFund?

Get Started

Sign up for investment updates, articles, & exclusive offers