Commercial Real Estate 101
Commercial real estate investing is its own separate world from residential property investments. Still, many commercial real estate investors get their start in single family residential real estate properties before making the leap to a multi-unit property. If you are deciding whether commercial real estate investing is right for you, it’s important to learn the basics. This article is called commercial real estate 101 because it provides some information you will need to know about commercial real estate before making the leap.
If you are considering making a move into commercial real estate, contact a real estate company who can offer you the support you need or click here to learn more about how to get into commercial real estate investing.
Commercial Real Estate 101
What is commercial real estate?
Commercial real estate is the sale, leasing, management, investment in or improvement of retail, industrial property, or investment property. It includes a variety of properties such as farmland, medical facilities, assembly plants, storage facilities, shopping centers, retail stores, mixed-use buildings, strip malls, mobile home parks, and office spaces. Really, any building whose purpose is to run a business enterprise out of it or has multiple residential units is a commercial real estate property.
A commercial real estate property is a property that is typically leased out for business and retail purposes. A commercial real estate investor purchases or develops properties or raw land that have been designed for the purpose of leasing to commercial tenants. The commercial real estate investor collects rent from the business that occupies their commercial space.
A city’s commercial areas include districts, industrial parks, office parks, storage facilities, and strip malls; any area that is primarily made up of commercial buildings is a commercial area. Sometimes these areas are referred to as business districts, financial districts, or shopping centers.
Rural commercial areas include areas with apartment buildings, mobile home parks, storage facilities, strip malls, farms, meat processing plants, amusement parks, and retail shops. Often, small towns call their main retail shopping area “Main Street.”
What is a good ROI for commercial real estate investment?
A good return on investment for commercial properties is between 5% and 12%. This is an average percent range; the type of commercial property and the local market where the property is located should be taken into consideration when setting goals for ROI. To get more specific information on the potential for return on investment in your area, it is a good idea to speak to a local real estate company with expertise in a range of commercial properties.
The five types of commercial real estate
Commercial properties serve a broad range of purposes but are generally grouped into five main categories: office, retail, industrial, multifamily, and special purpose. Many commercial real estate investors specialize in one commercial asset type so it’s important to understand your options before making your first investment.
Understanding the differences between residential real estate and commercial real estate
If you already have experience as a residential real estate investor or you’re new to the real estate investing game altogether, it’s very important to understand that commercial real estate is valued differently from residential properties. There are three major differences between residential and commercial real estate investing:
- Commercial real estate is typically valued by usable square footage and the amount of income the property brings in to the owner
- Commercial property leases are usually longer than residential leases (from one to 10 years)
- Commercial real estate loans are typically five to 20 years (instead of 15-30).
Benefits of commercial real estate investing
There are many benefits to investing in commercial real estate, depending on your investment goals. Some commercial real estate investors choose commercial real estate in order to grow future wealth and security, some prefer to invest their dollars in a tangible asset instead of the stock market, and others enjoy the tax benefits and investment portfolio diversification. Whatever your investment goals, commercial real estate has the potential to be a great investment. Here is a list of the main benefits of commercial real estate investing:
- Higher potential income
- Consistent cash flow
- The option to invest in owner-occupied commercial real estate
- Long leases
- Less competition
- Potential to form business relationships
- Reasonable operating hours
Commercial real estate trends
Commercial real estate doesn’t exist in a vacuum and it’s always a good idea to understand both local and national trends before making a large investment. Commercial real estate is affected by economic forces, employment trends, interest rates and, of course, pandemics that send workers home from their offices. In 2022, we are settling into a new normal with many offices implementing hybrid work schedules where workers spend at least part of their week in the office. Surging e-commerce sales has increased demand for industrial properties. Read more about commercial real estate trends in 2022.
If this article has piqued your interest in commercial real estate, we are here to answer your questions!
Turn to Windermere for real estate done exuberantly right.
For 50 years, Windermere has used our extensive knowledge of local markets to offer a full range of services that match your commercial real estate needs. Whether you’re a business looking to buy or lease space, or an investor interested in private capital or institutional properties, you’ll benefit from our experience in all phases of commercial real estate, including leasing, business development, brokerage, property management, and consulting.
You can depend on our powerful network
Windermere Commercial has established connections with highly reputable brokers throughout the nation. We also have the benefit of being affiliated with Windermere Real Estate, so you aren’t simply hiring a broker; you’re hiring an entire company with an extensive team of dedicated professionals whose highest priority is to help you reach your commercial real estate goals.
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