Commercial Real Estate: Defined


Whether it’s buying and selling homes, constructing skyscrapers or managing shopping centers, commercial real estate is the backbone of the world economy. Without it, businesses can’t operate, patients can’t receive care and consumers won’t be able to purchase products. The industry offers lucrative opportunities, but it’s also a risky investment with higher initial costs and more financial exposure.

Investors in commercial real estate seek returns through rental income, property appreciation or both. While some investors buy properties outright, most choose to lease rather than pay upfront costs. Lease payments often include taxes, maintenance and insurance. In addition, commercial properties are typically larger buildings on substantial plots of land in densely-populated business areas that can be much more expensive than residential properties.

As a result, only large, deep-pocketed firms can afford to invest directly in commercial real estate. However, many people can invest indirectly in CRE by purchasing shares of REITs (real estate investment trusts) or crowdfunding platforms that manage CRE assets. Indirect investing offers a less hands-on approach to CRE, but it can still generate attractive returns with a relatively small initial investment.

There are eight main types of commercial real estate: retail, office, mixed-use, industrial, hospitality, medical office, laboratories and special purpose. The last category includes properties that don’t fit neatly into any of the above categories, such as open land for fairs, amusement parks or churches and specialized facilities like bowling alleys or self-storage.

Office buildings are a major segment of commercial real estate, and they can range from high-rises to mid-rises to walkups. They can be located in urban or suburban areas, and they may offer a variety of floor plans and amenities to accommodate different types of tenants.

Retail real estate encompasses a broad spectrum of stores, restaurants and service providers that are located in malls, shopping centers, strip malls and standalone shops. These properties are sought after by retailers that want to reach a broad base of customers with limited marketing expenses.

Unlike a traditional retail store, which is usually occupied by an owner-occupant, most restaurants, malls and shopping centers are tenant-occupied. However, some retailers do prefer to own their space as a way of controlling their brand and operations.

Industrial real estate can include warehouses, manufacturing plants and other research and development facilities that are used for the production or processing of goods. These facilities are usually large, highly functional and require lots of power.

The hospitality sector includes hotels and resorts. These properties are unique in that they can be operated for both leisure and business purposes. They may offer a wide variety of amenities and features to attract different kinds of guests, including meeting spaces, spas, restaurants and recreational activities.


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