Commercial real estate is property that is used for business purposes. In other words, it is property owned with the purpose of producing income. Commercial real estate investors make money by leasing their space to tenants and collecting rent. These leases vary in duration, with the terms depending on the type of commercial real estate space being rented out. Commercial real estate encompasses a wide range of properties, from the local gas station to a city center skyscraper. There are six major categories of commercial real estate spaces.
Retail commercial real estate properties are occupied by the retailers that consumers visit. They include spaces such as grocery stores, big box stores, and strip malls. Retail properties can be grouped into four major types:
- Strip centers – Smaller retail centers that contain a mix of businesses, such as nail salons and take-out restaurants. These centers may feature a single, larger-name anchor tenant in order to draw in customers.
- Community retail centers – Larger retail spaces that consist of several anchor tenants, such as drugstores and grocery stores, along with smaller businesses.
- Power centers – These centers feature several well-known, big box retailers as anchor tenants, along with smaller retailers.
- Mall – Regional malls can range from 400,000 to 2 million square feet, and usually feature big-box retailers and department stores as anchors.
Examples of commercial real estate office properties include skyscrapers, single-tenant buildings, and small professional buildings. Office buildings are usually compared and rated under a Class A, B, or C system:
- Class A Buildings – Have both the highest-quality construction and are located in the most desirable areas. They often have higher-than-average rent for the locale.
- Class B Buildings – Have high-quality construction, but are not as ideally located as Class A Buildings. They usually have a rent that is within the average range for the locale.
- Class C Buildings – Are older buildings with poor construction and location, and which have a rent that is below average for the locale.
Commercial real estate office spaces can be found in both metropolitan areas and suburban areas, and generally have long-term leases.
Apartments/Multi-Family Residential Buildings
Although apartment buildings and other multi-family structures are occupied by residents, the investors that own the buildings own them in order to make a profit. Thus, these properties are considered to be commercial real estate. Multi-family residential buildings are located in both urban and suburban areas, and can be loosely classified into three major types:
- High-rise apartments – Usually have 100-plus units, are professionally managed, and are located in larger markets.
- Mid-rise apartments – Have a moderate number of stories (from 5-9), contain between 30 to 100 units, and are often located in urban infill locales.
- Garden apartments – Are less than four stories tall, contain anywhere from 50-400 units, and are located in the suburbs.
Leases in the multi-family commercial real estate category are generally short – one to two years.
Industrial commercial real estate includes properties that are designed for industrial use, such as warehouse facilities. There are four major types of industrial properties:
- Flex space – Easily convertible industrial property that can consist of both offices and warehouses.
- Bulk warehouse – Very large properties that are utilized for product distribution within a certain region; accordingly, they must be in a location that offers easy access for cargo vehicles.
- Heavy manufacturing – Spaces that are highly customized with equipment and machinery, and that would need extensive renovation for a subsequent tenant to occupy.
- Light assembly – Simpler than heavy manufacturing properties, these spaces are capable of being reconfigured easily, and may be utilized for product assembly, storage, etc.
Industrial properties usually feature long-term leases, and tend to be occupied by single tenants.
A hotel is an establishment that offers lodging for the public, and in some cases entertainment, food and beverages, and personal services. Examples of commercial real estate hotel properties include luxury resorts, motels and business hotels. Hotels may be independently operated or part of a chain, and hotel commercial real estate can be broken down into three main groups:
- Full service – Centrally located in tourist locations or business districts, these are operated by big names and offer amenities such as room service, convention space, and more.
- Limited service – Usually boutique properties, limited service hotels are smaller and do not offer the aforementioned amenities of full service hotels.
- Extended stay – Featuring bigger rooms along with small kitchens for longer stays.
Special purpose commercial real estate are properties that are owned for business purposes, but which cannot be classified into any of the above categories. An amusement park, for example, would be considered as special purpose commercial real estate.
In addition to commercial real estate, there are two other types of real estate: residential real estate and industrial real estate. Whereas commercial real estate is used for commerce purposes, industrial real estate is used for manufacturing and producing goods, and residential real estate is used as living spaces.