Investing in Commercial Real Estate

commercial real estate

Investment in commercial real estate may be suitable for those with substantial funds; however, the risk associated with these investments is greater than residential investments.

Residential properties tend to be owned outright while most commercial buildings are leased by businesses. There are three categories of commercial real estate: office, retail and industrial. Specialized buildings such as hotels and warehouses also comprise this genre.

Office Buildings

Office buildings are commercial real estate properties used to house offices, meeting rooms, desks and a variety of other office functions. From single-story structures to skyscrapers, they come in all sizes. Office parks or complexes may collect them into one building to provide more amenities for multiple tenants within it. These types of properties may also be leased individually to individual businesses within one building if not shared between multiple tenancies within it.

Property for commercial use may be located either within a central business district (CBD) or more suburban locations. CBDs tend to be found in larger cities with numerous skyscrapers while suburban office buildings generally consist of mid-rise structures situated on large office park campuses. Office buildings may also be classified into different classes based on quality construction and location.

Class A properties are among the highest-grade buildings available, typically situated in areas that are highly sought-after and boasting cutting-edge amenities and systems. These buildings may be new or extensively renovated and tend to draw tenants with rents that exceed market average.

Class B properties represent a level of quality between Class A and C buildings, typically featuring excellent standard finishes in desirable locations with older structures that could benefit from renovation. Class C buildings tend to offer subpar standards, amenities, and less-than-ideal locations compared to their counterparts.

Industrial property can include anything from light assembly to bulk warehouses. Some industrial properties, like manufacturing facilities, may be difficult to repurpose once their tenant departs.

Retail properties consist of the stores and restaurants we frequent on a daily basis. Retail can take many forms: malls or shopping centers that house many different retailers under one roof; individual buildings housing one retailer; multifamily residential complexes renting to individual tenants, etc.

Retail Buildings

Commercial real estate investments can be highly rewarding; however, they typically require higher upfront investments and can be more challenging to sell when the economy dips. Triple net leases offer protection by requiring tenants to cover additional costs like maintenance and insurance in addition to paying rent.

Residential real estate properties are typically used by people as living space; commercial real estate, on the other hand, typically leases out to businesses for revenue generation purposes and can range from single storefronts to entire shopping centers.

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Retail spaces are generally used by operations focused on selling merchandise and services, including hair salons, local shops, grocery stores and big-box stores – as well as restaurants of various types.

Hospitality buildings may also qualify as commercial real estate depending on their size and purpose; small neighborhood-style hotels and bed and breakfasts fall under this classification, while larger hotel complexes like hotels or resorts are categorized as hospitality properties.

Multifamily apartment buildings are another common type of commercial real estate, often falling under multiple categories depending on their size and location. High-rise apartments feature 12 stories or more while mid-rise buildings range between five and 12 stories and low-rise structures have less than five stories.

Industrial buildings are generally dedicated to logistics and warehouse storage, although they may also serve as showrooms or distribution centers. This category also encompasses bulk warehouses, light manufacturing spaces and flex spaces that combine industrial with office space.

Commercial property investors tend to be more comfortable dealing with business owners (a B2B relationship) than individual tenants, and can take advantage of relatively longer lease agreements with tenants. Commercial real estate investment provides stable cash flows as well as opportunities for capital appreciation – making it an essential component of any diverse portfolio.

Industrial Buildings

Industrial buildings are large structures designed to produce or store products or raw materials for sale, including factories, mills, mines and oil wells, distribution centers and warehouses. Furthermore, this category also encompasses properties with specific uses such as e-commerce fulfillment centers, data centers or movie studios.

People might conjure images of smoke-belching brick chimneys and assembly lines at General Motors factories when they think of “industrial.” While those are representative images, other types exist which work very differently from each other.

Bulk warehouses are the most prevalent form of industrial property, storing large volumes of goods and materials for sale. Usually located outside urban areas and along major highways, bulk warehouses can be used for almost any manufacturing or storage function regulated by industrial zoning laws.

Light assembly buildings are another type of industrial property, typically housing offices and testing spaces for companies producing electronics or automotive components. Although not as large as manufacturing plants, light assembly buildings do need special cooling and ventilation systems in place.

Research and development buildings are an increasingly sought-after subset of light assembly properties, providing laboratories, offices and testing space for R&D companies that create new or improved products. Many hi-tech firms also require such facilities as they require significant amounts of electricity consumption as well as security systems and backup generators for proper functioning.

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Other types of industrial properties include data centers, which serve as hubs where companies store the equipment necessary to keep networks operational and store sensitive data. Data centers may also include flexible spaces.

Showroom properties represent another industrial category, featuring office and warehouse space designed specifically to support companies selling or demonstrating products physically. Such companies often require large parking lots, high ceilings and unique display areas that differ significantly from standard office buildings.

Special-Purpose Buildings

Special-purpose buildings such as churches, schools, historic properties and repurposed industrial structures typically require unique property appraisals due to their irregular sales cycles. An appraiser can assist by focusing on the business aspects of these properties as an asset to be appraised.

Even with these challenges in mind, it is possible to perform an accurate and professional unique property appraisal. However, this takes more work and attention to detail than your average office, retail or industrial appraisal.

To conduct an effective special-purpose property appraisal, it’s crucial to understand the business components of a property – commonly referred to as “business assets.” This term encompasses equipment, fixtures and other assets used in connection with its operations.

As with other forms of commercial real estate, you’ll discover many unique properties for sale. Some are transformed into restaurants, wedding or event centers, daycare facilities or flex space commercial property while others may be transformed into apartments or offices.

If you’re reviewing an appraisal for an unusual property, it is imperative that comparable properties that are similar in size and location be found if there are none nearby. Furthermore, review of the WUR will help ensure alternate uses were considered when creating its appraisal report.

Cost approaches may also be effective ways of appraising individual properties. This practice compares their value with replacement costs adjusted for depreciation. While this method may be unpopular, sometimes it is the only viable choice available to us.

Most CMBS lenders, banks, and mezzanine lenders require that real estate investments are placed into an SPE to receive tax advantages when being sold off by investors.

Commercial real estate terminology often misleads when discussing “special purpose properties.” The phrase refers not only to intended or zoning uses of properties but also how these relate to the land occupied. Natural land formations do not qualify as special-purpose properties since they don’t serve any specific human intent, while churches or schools tend to fall under this classification because they serve a more defined intent.

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