What is 'Commercial Real Estate'
Commercial real estate is property that is used solely for business purposes. Examples of commercial real estate include malls, office parks, restaurants, gas stations, convenience stores and office towers. Commercial real estate is one of the three primary types of real estate; the other types are residential real estate and industrial real estate.
BREAKING DOWN 'Commercial Real Estate'Commercial real estate includes various types of real estate from gas stations to shopping centers. As its name implies, commercial real estate is used in commerce. Residential real estate is used for living purposes, while industrial real estate is used for the manufacture and production of goods. While residential real estate may be quoted in total price or rent per month, commercial real estate is customarily quoted in dollars per square foot through lease agreements, as businesses that occupy commercial real estate usually lease their spaces. An investor usually owns the building and collects rent from each business that operates there.
Types of Commercial Real Estate Leases
There are four primary types of commercial real estate leases, each requiring different levels of responsibility from the landlord and the tenant. In addition to rent, a single net lease makes the tenant responsible for paying property taxes. A double-net (NN) lease makes the tenant responsible for paying property taxes and insurance. A triple-net (NNN) lease makes the tenant responsible for paying property taxes, insurance and maintenance. Under a gross lease, the tenant pays only rent, and the landlord pays for the building's property taxes, insurance and maintenance.
Commercial Real Estate Classifications
Commercial real estate can be a shopping center with multiple retail tenants or a skyscraper with dozens of tenants. Commercial real estate is categorized into different classes. Office space, for example, is divided into one of three classes: class A, class B or class C. Class A represents the best buildings in terms of aesthetics, age, quality of infrastructure and location. Class B buildings are usually older and not as good-looking as Class A buildings. These buildings are often targeted by investors for restoration. Class C buildings are the oldest, usually over 20 years of age, located in less attractive areas and in need of maintenance.
Investing in Commercial Real Estate
Investing in commercial real estate often requires a considerable amount of startup capital and extensive knowledge of the legal, financial and regulatory aspects of owning this type of property. Investors who don't want to deal with these hassles directly can gain exposure to commercial real estate through real estate investment trusts (REITs). Commercial real estate REITs are publicly traded on stock exchanges, so they are easy to buy and sell, providing liquidity to investors who otherwise would not have it by owning commercial real estate properties directly. Commercial real estate REITs can provide income to investors as well as capital appreciation.