What is Commercial Real Estate?
Commercial Real Estate (CRE) are all properties that are used for income-generating activities. They are mostly used for business purposes but also include large multi-family housing. CRE comprises the main activities of investing in, developing and operating a wide range of property types such as:
- Office buildings (Class A, B and C)
- Multi-Family residences
- Industrial buildings
- Mix use buildings
- Special purpose buildings (Stadiums, Zoos, Hospitals, …)
Tenants of those buildings are usually generating an income from their activities; the lease conditions are often attractive and deliver a long-term revenue stream for the owner of the property. Most investment strategies have CRE as part of the portfolio. CRE as a sub-asset class of property however is less liquid and requires a higher initial investment.
This category of buildings usually includes those that are the newest and of the highest quality. They are located in the best areas (Central Business District) and have the best infrastructure. Class A buildings have high-quality amenities and low vacancy rates.
Buildings in this class are older, have lower quality construction and amenities than class A. Their location is good but not directly in the centre and they are less pricy. This makes it a good option for investors, as they can improve class B buildings to bring them up to class A again.
This is the least desired category of buildings. These are usually older than 20 years and built in less favourable areas. Class C buildings are often run-down and in need of renovation. Their amenities are very old and the rental prices lower than the average rates.
- Higher Returns
The possible return on your investment for a commercial property is usually higher than the one from residential buildings. CRE generates approximately 6% – 12% while residential only generates 1% – 4%.
- Risk Diversification
In comparison to single-family residential homes, large CRE buildings with up to hundreds or thousands of tenants can help to diversify your rental income. With more tenants, you will rarely come to the point where you won’t generate any rent as someone will always live/work in the building. With a single-family house, when the tenant moves out, your income is equal to zero.
- Working Hours
While residential tenants live in their apartment or house for the whole day, commercial tenants are there most likely only during working hours. This makes managing the property easier as you don’t need to employ that many people for night shifts.
Offices and residential buildings are often located in busy, public places. Tenants will take extra care of their property because if they won’t their reputation might go down.
- Tax Advantages
In some countries, commercial real estate might receive certain tax advantages. This will allow you to increase your returns.