What is Commercial Real Estate? The response is simple: Commercial real estate (CRE) is property used for business-related purposes or to offer workspace rather than living space. Most often, commercial real estate is leased by tenants to conduct income-generating activities. This broad category of real estate can include everything from a single storefront to a massive factory or a warehouse.
The business of commercial real estate has to do with the construction, marketing, management, and leasing of property for business use.
There are several categories of commercial real estate such as retail and office space, hotels and resorts, strip malls, restaurants, and healthcare facilities.
Understanding Commercial Real Estate (CRE)
Commercial real estate and residential real estate are the two primary categories of the real estate property business.
Residential properties are structures reserved for human habitation rather than commercial or industrial use. As its name implies, commercial real estate is used in commerce, and multiunit rental properties that serve as residences for tenants are classified as commercial activity for the landlord.
Commercial real estate is typically categorized into four classes, depending on function:
- Office space
- Industrial use
- Multifamily rental
- Retail
Individual categories may also be further classified. There are, for instance, different types of retail real estate:
- Hotels and resorts
- Strip malls
- Restaurants
- Healthcare facilities
Classifications of Commercial Real Estate
Broadly, commercial real estate can be classified into:
1. Multi-family Real Estate
Multi-family real estate is housing with multiple units, ideally ensconced within one physical structure. They exist in the space between commercial and residential real estate. They are considered commercial property since owners can look at them to generate income and not primarily to reside in them.
They can be urban or suburban as far as location goes and can be mid-rise or high-rise. Such a property is understood to be a safe investment since, despite the transient nature of residents, a few vacant properties do not impact the profitability of a large apartment building.
2. Office Space
Office buildings can also be mid-rise or high-rise and are usually classified into multiple formats. Office leases are typically long-term since management does not want to shift its workforce around frequently.
Office space can be premium, as far as location and infrastructure are concerned, they have excellent facility management systems in place. High-rise office buildings in metro city areas fall under this category.
Functional facilities that are professionally managed but lack the characteristics of premium properties are another category of office real estate. They are usually not located in the metro or more urban areas.
Further, certain office space requires extensive renovations or are found in undesirable locations. They are at the bottom rung of commercial office buildings.
3. Retail Space
Retail space is considered for a wide range of commercial purposes. From neighborhood stores to large malls and entertainment places, retail space is more expensive than office space due to its proximity to high-traffic areas.
Retail leases are also long-term and usually house some anchor tenants, which offer a bigger brand pull. Such brands help in getting more foot traffic.
4. Industrial Real Estate
Industrial real estate constitutes warehouses, manufacturing hubs, distribution centers, etc., and is usually located outside the periphery of urban or residential areas.
Logistic hubs and special economic zones make up clusters of such commercial real estate.
5. Mixed-use Spaces
Mixed-use spaces are also popular, especially in urban areas. They can accommodate retail or restaurants at the bottom with office or residential spaces above them.
Also, included in this category are hospitals, nursing homes, and hotels that pay rent or lease the available building space.
The Current State of Commercial Real Estate
As Izabelle Hundrev elaborates in “What is Commercial Real Estate: The Basics of CRE,” there are various commercial properties that are guided by different lease agreements. Since income generation is a primary objective, real estate investors or business owners look at such properties for investments and exist in an ecosystem with specialist commercial property agents.
A recent CBRE study looks at how innovations in space designation and management are leaning towards hybrid models changing the previous linear operational model. In office spaces, remote working options and flexible working options are being looked at as part of the entire real estate portfolio, so occupiers will also focus on them more given the current times.
The study also elaborates that there would be a gradual move away from traditional closed spaces as shared formats become popular. Collaborative spaces are expected to see higher demand, it added.
To learn more about the core concepts of commercial real estate lending, check out CFI’s Real Estate Fundamentals course!
Additional Resources
CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class credit analyst.
To help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:
- Commercial Properties REITs
- Home Office
- Locational Obsolescence
- Quality of Real Estate
- See all commercial real estate resources.
The Bottom Line
Commercial real estate has the potential to offer steady rental income as well as capital appreciation for investors.
Investing in commercial real estate usually needs larger amounts of capital than residential real estate, but it can offer high returns.
Investing in publicly traded REITs is a reasonable way for individuals to indirectly invest in commercial real estate without the deep pockets and specialist knowledge needed by direct investors in the sector.
