What Is Commercial Real Estate?

Commercial real estatesometimes referred to as commercial property, is a kind of investment property used by organizations as a place to do business.

Unlike residential real estate, which is limited largely to either homeowners or renters who use properties as living space, commercial real estate covers a wide array of possibilities.

Commercial property can be an office building rented to white-collar employers, a single-tenant retail structure like a restaurant or big box store, an industrial park full of warehouses, a medical facility like a hospital or surgical center, or just about any other structure not used as a dwelling.

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Every type of organization rents commercial real estate. While some corporations, nonprofits and government entities buy property outright, tenants often prefer to lease facilities instead.

That’s because while it may be more expensive in the long run, most organizations prefer the flexibility that comes with renting rather than being locked into one location for decades to come. Many corporations prefer to use their cash to do business rather than buying an expensive facility using a lot of upfront cash.

Deep-pocketed firms are typically the only investors that can afford to invest directly in commercial real estate, as most lucrative commercial properties are large and in dense urban areas.

As one example, consider the iconic Empire State Building – one of the most prestigious and in-demand office buildings in the world. It’s valued at more than $2 billion and is owned by a publicly traded real estate firm, Empire State Realty Trust Inc. (ticker: ESRT

It’s simply not practical for individual investors, even many wealthy ones, to own commercial real estate directly. This is particularly true when it comes to large, attractive properties.

There are several ways investors can get a piece of commercial real estate as part of an investment group, or at least gain indirect exposure to these assets. They include:

crowdfunding. There are a host of real estate-focused crowdfunding sites out there, including CrowdStreet, DiversyFund, PeerStreet and Fundrise. Hundreds or even thousands of small-time investors pool modest sums to gain exposure to commercial real estate this way.

Publicly traded real estate firms† There are a host of stocks like the Empire State Realty Trust that owns property. There is even a special class of stock called real estate investment trustsor REITs, to accommodate publicly traded commercial real estate firms.

private equity funds† If you have substantial cash, you can invest in a larger and more exclusive private equity fund for direct commercial real estate exposure. Keep in mind that the minimum investment in private equity funds is often tens of millions of dollars, with the most affordable funds demanding at least $250,000 from each investor

Commercial real estate can be a good way to diversify your investment portfolio. All investments carry risk, but certain forms of commercial real estate carry relatively low risk compared with other assets.

For instance, it’s not uncommon for commercial real estate tenants to sign seven-year or even 10-year leases. This offers a lot of reliability to landlords. Furthermore, certain commercial real estate investments can withstand recessions, as these tenants include government offices, hospitals or other organizations that won’t go away even if the broader economy gets rocky. And of course, the reliable cash flow from monthly rents adds a bit of certainty you won’t find in more discretionary expense categories.

You should always do your research on any investment, but there are a host of commercial real estate investments out there that tend to perform more consistently than other assets over time.

FAQs

As with all investments, this asset is good for some people but not appropriate for others. While there is stability and long-term income potential from commercial real estate, it often takes a large upfront investment and can be hard to sell if you need your money back in a hurry. You should always look at your personal financial needs and risk tolerance before making any investment.

It depends on the market, since all real estate is local and all properties are different. But generally, commercial property is much more complex than residential property or other asset classes. When you add in tenant needs, the unique attributes of the property, the vagaries of financing transactions, and local rules and regulations, there’s a lot to keep track of. The good news is that most investors don’t have to navigate that alone and instead rely on a consortium, investment fund or another vehicle to sort out the details.

Believe it or not, you can get started with as little as $10 on some commercial real estate crowdfunding platforms. That said, you may not have a lot of options at your disposal at that level and you may see the majority of returns eaten up by costly fees. As with many investments, it’s important to read the fine print to understand your potential costs as well as your potential rate of return.

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