Commercial real estate is a type of property used for business purposes only. Commercial property covers office buildings, retail buildings, industrial facilities, hotels, land. However, even if you invest in residential property and plans to rent it out to generate a profit, this property is also will be considered as residential.
In plain language, industrial property is used for industrial purposes. However, this definition covers the number of different properties that serve different business aims. Let’s divide industrial property according to the size – small, large, and vast. The industrial property serves for warehouse, research and development, and manufacturing tasks of business.
Small industrial properties usually consist of warehouses and administrative offices. Large properties also consist of the warehouses but also includes factories. They aim to produce goods and storage, while vast properties are a mix of logistics and warehouses centers.
Investing in industrial real estate can be risky. Meanwhile, higher risks mean higher yields. However, if you are an experienced and wealthy investor, then you know how industrial property reacts to economic changes. Vacancy risk can be high. However, high yields in the amount of 8% will encourage seasoned investors to consider investing in industrial real estate.
Retail property used to sell goods and services. Speaking about retail, most people will think about Walmart. However, it includes all kinds of shops, malls, lifestyle and power centers, community, convenience, and neighborhood centers. The retail real estate can be small or include hundred of individual businesses. 25% of all American commercial property belongs to the retail property. Long leases and high yields attract investors. The vacant place won’t have a substantial impact on the cash flow. However, if the retail property fails to bring you income in some period for any reason, it will be difficult to sell such property.
When thinking about commercial building, the first thing to imagine is a skyscraper. Office building can be found anywhere in the United States, Europe, and developing countries. Office building falls into the categories Class A, Class B, and Class C. In general, the specific class depends on the age of the building, amenities, and aesthetics. As a rule, office building consists of a receptionist area, private offices, restrooms, conference rooms, and amenities.
More young companies, especially IT companies, tend to choose more creative space for their businesses. That is why an investor should understand where the modern business wants to work. For example, open one-floor space with no private offices or open co-working space.
Medical centers also belong to office properties.
Commercial land is raw or undeveloped land that can be used for business purposes. It can be used for manufacturing plants, parking lots, and warehouses.
Advantages and Disadvantages of Commercial Real Estate
One of the biggest things that attract investors is a long-term lease contract with tenants. At least, the term will be five years. In this case, an investor is sure in stable cash flow. Moreover, commercial property tends to capital appreciation in case it is high-maintained.
As a rule, tenants are responsible for any other expenses related to property. Plus, tenants put much effort into maintaining the property as it the face of their business. Being a commercial real estate owner helps you to diversify your portfolio.
However, it is better for you to have a cash buffer in case of a long vacancy. It should not take longer than six months to find a tenant. However, it is always better to be prepared to pay for ongoings while you found a new tenant. Commercial property tends to react more dramatically to any economic or infrastructure changes. Lease terms are more complicated for commercial property. So, be ready to work closely with your lawyer.