What is 'Commercial Property'
Commercial property refers to real estate property that is used for business activities. Commercial property usually refers to buildings that house businesses, but it can also refer to land that is intended to generate a profit, as well as larger residential rental properties. The designation of a property as a commercial property has implications on the financing of the building, the tax treatment and the laws that apply to it.
BREAKING DOWN 'Commercial Property'
Commercial property includes malls, grocery stores, office buildings, manufacturing shops and much more. The performance of commercial property, including sales prices, new building rates and occupancy rates, is often used as a measure for business activity in a given region or economy. For the United States as a whole, Moody's provides the Moody's/RCA Commercial Property Price Indices (CPPI), which measures the price changes in commercial real estate across the country.
Investing in Commercial Property vs. Residential Property
From an investment perspective, commercial property has traditionally been seen as a sound investment. The initial investment costs of the building and the costs associated with customization for tenants are much higher than residential real estate, but the overall returns are also higher, and some of the common headaches that come with tenants aren't present when dealing with a company and clear leases. Commercial property investors can also utilize the triple net lease, where the risks are passed on to the leasing business to an extent that is not available to residential real estate investors. In addition to more control over lease terms, commercial property tends to have more straightforward pricing considerations. A residential property investor has to look at a number of factors, including the emotional appeal of a property to prospective tenants. In contrast, an investor in commercial properties will have an income statement that shows the value of the current leases, which then can easily be compared to the capitalization rate for other commercial property opportunities in the area.
Investing in Commercial Property through REITS
If you want to invest in commercial properties but don't have the capital or the desire to purchase a whole building, real estate investment trusts (REITs) can achieve the same end in more manageable portions. REITs operate like mutual funds in that they pool investment dollars to purchase assets, and the shares of the REITs themselves become the trading instruments representing the underlying assets. Simply put, REITs that specialize in commercial properties offer shares to investors to raise the capital to purchase a portfolio of income-producing properties. Investors can buy and sell those shares on exchanges. Buying shares in a commercial property REIT gives you exposure to commercial property without requiring you to buy a building on your own.