Investing in Commercial Real Estate: Here’s what you need to know

Commercial real estate investment, as the name implies commerce, refers to the placement of capital in properties exclusively used for business or workplace functions to generate gain or rental income.

This broad category of real estate can include everything from a single business center personally run by one man to a huge shopping center, leased out to a number of tenants.

Commercial real estate includes several categories, such as retailers of all kinds: office space, hotels and resorts, strip malls, restaurants, and healthcare facilities.

Basically, commercial real estate is divided into 4 on the basis of function. They are;

  • 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 has several subtypes. It is often characterized as class A, class B, or class C:

Class A refers to premium buildings in terms of aesthetics, age, quality of infrastructure, and location. They have excellent facility management systems in place. High-rise office buildings in metro city areas fall under this category.

Class B buildings are professionally managed but not as competitive—price-wise—as class A buildings. Investors often target these buildings for restoration.

Class C buildings are the oldest, usually more than 20 years of age, located in less attractive areas, and in need of maintenance.

ALSO READ: Why You Should Invest in an Apartment Building 

  • Industrial use

Buildings for industrial use house operations for the production of goods or services. It is mostly located outside of urban areas or residential areas,  especially along major transportation routes. It constitutes warehouses, manufacturing hubs, distribution centers, etc.

  • Multifamily rental

A multifamily property is any residential property that contains more than one housing unit. Duplexes, townhomes, apartment complexes, and condominiums are common examples of multifamily properties. 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 and are safe for investment.

  • Retail

There are certainly many different commercial uses for retail space.  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.

Long-term retail leases are also common, and they frequently include a few anchor businesses with a stronger brand appeal. These brands aid in increasing foot traffic.

Owning and maintaining leased commercial real estate requires complete and ongoing management by the owner. The modalities of maintenance can be hinged on the type of business activities carried out. Also, the function of a commercial real estate management firm would extend to finding, managing, and retaining tenants, overseeing leases and financing options, and coordinating property upkeep and marketability.

Commercial properties are a high-risk, high-reward real estate investment. Investing in commercial real estate can require a larger upfront investment but be potentially lucrative and serve as a hedge against the stock market’s volatility. Investors make money through property appreciation when they sell, but most returns come from tenant rents.

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