What is Commercial Real Estate?

Properties that are primarily used as workplaces or for company activities are referred to as commercial real estate (CRE). Residential dwelling areas are not for CREs. These assets are usually leased to tenants for the purpose of generating revenue. This broad industry contains a variety of assets, ranging from retail stores to massive shopping centres.

There is a wide variety of commercial real estate available. It has residential stores, office buildings, and businesses including cafes, restaurants, and warehouses. CRE full form is Commercial Real Estate and it can yield profits through long-term leases or by strategically holding and then reselling the property.

There are several categories in the field of commercial real estate. The categories cover a range of retail outlets, workspaces, and lodging facilities. These places include motels and resorts, shopping centres, restaurants, and medical services are some examples.

According to Statista report, India’s Commercial Real Estate market size is anticipated to achieve a staggering value of US$5.47tn by 2024.

So far we have learnt about what is commercial real estate, but now we will learn more about the types of commercial real estate.

Types of Commercial Real Estate

Commercial real estate (CRE) includes various properties designed to meet certain business requirements. Below is a summary of some of the important categories in this vast field, it will give you a better idea about the types of commercial property:

Office Spaces:

These include anything from small office complexes to massive corporate towers. It is there to offer workspaces for companies across all sectors and sizes.

Retail Properties:

This category includes a wide range of properties, from single stores in cities to large complexes. This also applies to malls satisfying various demands of both customers and merchants.

Hospitality Establishments:

Travellers and visitors can look for lodging facilities and amenities in hotels, resorts, and other hospitality establishments. It also supports the thriving travel and hotel sector when we try to understand what is commercial real estate.

Industrial and Warehousing Facilities:

Distribution centres, industrial complexes, and warehouses operate as central locations for production, warehousing, and logistics. It also makes it easier for resources and things to move between different sectors.

Multifamily Residential Buildings:

These are multifamily structures that include commercial space in addition to their primary concentration on housing. Such luxuries or ground-floor retail areas, help to bridge the gap between residential and commercial real estate.

Healthcare Facilities:

A vital component of the commercial real estate market is hospitals, doctors’ offices, clinics, and speciality healthcare facilities. The various healthcare requirements of communities are also met by healthcare institutions.

Mixed-use Developments:

These include commercial, residential, and occasionally even recreational elements on the same plot of land or complex. Furthermore, the live-work-play situations are fostered by the mixed-use projects.

Also Read: Tax Benefits of Buying a Commercial Property

How to Invest in Commercial Real Estate?

After understanding what is commercial real estate, it is interesting to learn about investing in commercial real estate (CRE), which is a lucrative business opportunity for investors, especially for those people who are seeking stability and diversity. This section will also help you understand why to invest in commercial real estate? Here are a few methods to get started as an investor, regardless of experience level:

Direct Investment

Individual Purchase: It is possible to make a direct purchase of a commercial asset. This might be individual or joint ownership of the property. In addition to maintaining the property, you will be in charge of managing the renters.
Define Your Investment Goal: Choose whether you want to focus on long-term rental income, appreciation of your property, or both.
Research Markets and Properties: Look at possible marketplaces and find homes that fit your investing plan.
Secure Financing: Choose the best source of funding, be it a private lender, bank loan, or some other way.
Negotiate Terms: Make an offer and work out the conditions of the transaction.
Due Diligence: Take all necessary precautions, such as financial analyses, legal investigations, and property inspections.
Close the Deal: Close the real estate deal once you are happy.
Property management: It includes overseeing upkeep, managing tenant relations, and managing the investment.

Real Estate Investment Trusts (REITs)

Without actually owning any real estate, REITs let you make indirect CRE investments.

Operation of REITs: You purchase stock in a business that owns and operates commercial real estate—the REIT. Exchanges for stocks deal in these shares.
Dividends: REITs use dividends to provide their shareholders a portion of their income.
Diversification: REITs provide a range of property kinds and locations for diversity.
Liquidity: Purchasing and selling REIT shares is simple, in contrast to direct ownership.

Platforms for Crowdfunding

Crowdfunding enables you to pool money with other investors to make investments in CRE initiatives.

Online Platforms: Look into crowdfunding sites with a focus on real estate for business purposes. These platforms provide chances for investments with different minimum investment amounts.
Risk and Returns: Recognise the possible risks and rewards connected to any undertaking.
Investing in CRE passively: Without active management, crowdfunding is a passive method of participation.
Fractional Ownership: You may acquire a piece of commercial property through fractional ownership platforms.
Benefits: You may diversify your investment across several properties, invest with a reduced initial financial expenditure, and take advantage of expert management.
Legal Structure: To have fractional ownership, one usually has to create a legal company (such as an LLC).
Selecting a Platform: Pick a reliable platform providing fractional ownership

Remember that CRE investments require careful consideration, research, and alignment with your financial goals.

Difference Between Residential and Commercial Property

The key differences between what is commercial real estate (CRE) and residential property are mentioned in detail below. Let’s figure out the commercial vs residential property difference here:

Purpose and Use

CRE: CREs are used for business purposes, which include office buildings, retail spaces, warehouses, and industrial facilities.
Residential: Residential properties are designed for living. They include single-family homes, apartments, condos, and townhouses.

Income Generation

CRE: Commercial properties generate income through rent paid by tenants or businesses and its focus is on financial returns.
Residential: Residential properties also generate rental income and their primary purpose is to provide a place to live.

Property Management

CRE: Managing commercial properties involves dealing with business tenants, lease agreements, maintenance, and property improvements.
Residential: Residential property management focuses on tenant comfort, repairs, and ensuring a safe living environment.

Market Dynamics

CRE: Commercial real estate markets are influenced by economic trends, business growth, and industry-specific factors.
Residential: Residential markets are affected by population growth, housing demand, and lifestyle preferences.

Lease Terms

CRE: Commercial leases are typically longer (e.g., 5 to 10 years). It may include additional costs (such as property taxes and maintenance).
Residential: Residential leases are usually shorter (e.g., 1 year), and can cover basic utilities.

Property Valuation

CRE: Valuation considers income potential, location, and market conditions. Here are the cap rates (capitalization rates) commonly used.
Residential: Valuation focuses on comparable sales (comps) of similar residential properties.

Zoning and Regulations

CRE: Commercial properties are here to adhere to specific zoning regulations based on their use (e.g., retail, industrial, office).
Residential: Residential properties follow zoning rules for housing and neighbourhood compatibility.

Emotional Factors

CRE: Decisions are often driven by financial analysis rather than personal attachment.
Residential: Homebuyers consider emotional factors like comfort, aesthetics, and lifestyle.

Also Read: Difference Between Residential and Commercial Property

Pros and cons of commercial real estate

Here are the pros and cons of commercial real estate which will help you better understand what is commercial real estate and its pros and cons:

Pros of Commercial Real Estate	Cons of Commercial Real Estate
1. Income Potential: Commercial properties typically offer more annual returns (6% to 12%) than residential properties (1% to 4%).	1. Higher Initial Investment: CRE often requires a significant upfront investment, making it less accessible for some investors.
2. Professional Relationships: Business-to-business interactions between landlords and tenants are important to maintain professionalism.	2. Ongoing Costs: Managing commercial properties involves ongoing expenses. This expense could be as maintenance, property taxes, and insurance.
3. Public Eye on Property: Retail tenants have a vested interest in maintaining their store rooms to benefit property value.	3. Complex Property Management: CRE management can be rigid due to the changing needs of the tenants and property types.
4. Limited Hours of Operation: Businesses operate during regular hours and it minimises the midnight emergency calls.	4. Market Risk: CRE prices can be influenced by economic fluctuations and this also impacts market conditions.
5. Objective Price Evaluations: It is easier to evaluate which is based on income statements and financial data.	5. Vacancy Risk: Empty commercial spaces can often lead to income loss.
6. Diversification: CRE allows diversification across property types (office, retail, industrial) and geographic locations.	6. Interest Rate Risk: Changes in interest rates impact CRE financing costs.
7. Long-Term Leases: Commercial leases are often longer (5 to 10 years) and provide stability for investors.	7. Tenant Turnover: Finding new tenants can be a time-consuming and costly process.
8. Appreciation Potential: CRE properties can appreciate over a period of time and it enhances overall returns.	8. Economic Cycles: CRE is sensitive to economic cycles. It also affects demand and rental rates.
9. Tax Benefits: Depreciation, interest deductions, and exchanges are best to offer tax advantages.	9. Property-Specific Risks: Each property type (e.g., office vs. retail) has unique risks.
10. Professional Management: Hiring property managers ensures efficient operations.	10. Liquidity Constraints: Selling CRE may take a longer time period than residential properties.