Commercial Real Estate 101: Defining CRE
“Commercial real estate” (CRE) is defined as any property that is used for business purposes. When you think CRE, think office parks, malls, restaurants, gas stations, convenience stores, doctor’s offices, warehouses, factories and even skyscrapers.Typically, the businesses that occupy space in those buildings lease that space from an investor who owns the building and collects rent form each operating occupant.
Types of Commercial Real Estate Property
There are six major categories of CRE property that potential tenants and investors should understand: office space, retail space, industrial, multi-family building, land, and miscellaneous.
Commercial Office Space
Commercial office property covers a variety of buildings that can range from soaring office towers to professional buildings to single-tenant spaces. Class A offices are new or recently renovated buildings with modern amenities in prime locations. Class B buildings are well-maintained but are not as new as a Class A structure, and they may require some capital improvements. Class C properties typically capture low rents, and are usually older buildings in need of renovation and may be situated in less-than-ideal locations.
Retail and Restaurant Space
Retail and restaurant properties can be free standing or they may be located in multi-unit structures like strip malls or the base floors of office or residential buildings. Leasing space in a structure like a traditional mall or strip mall are considered low-risk options for investors, as those structures attract other commercial tenants and high volumes of consumer foot traffic. Centers with popular “anchor stores” – grocery stores or popular department stores (think Giant Eagle, Target, or Macy’s) that draw shoppers – can command higher lease rates than centers without such an anchor store. Locations that host more than one anchor store can command even higher rates.
Industrial Real Estate
Manufacturing, distribution and other industrial sites can range from smaller buildings known as “flex space” to sprawling warehouses and manufacturing centers. Tenants must consider the specs of any industrial space before leasing. Height, total square footage, dock space, and access for trucks and other heavy machinery are critical for industrial locations. Single-use buildings with one tenant may not be attractive to some investors, while “flex” space, which can be used for both offices and industrial purposes are usually more attractive investment opportunities.
Multi-family properties are popular commercial real estate investments. They may be a small, converted home that hold four apartments, or they may be total apartment or condo complexes. The leases on these properties are typically short term and tenant turnover can be high.
There are several types of land available to CRE investors. An open field of undeveloped land is often referred to as greenfield land. Brownfield land referred to developed property that may have experienced an environmental compromise in the past, requiring cleanup before development is possible. Urban infill refers to land that had been previously developed but has sat vacant for a number of years.
Every other type of business you can think of falls into this catch-all commercial real estate category. Hotels, healthcare facilities, car washes, bowling alleys, theaters, sports complexes, funeral homes – all of these types of businesses fall under “miscellaneous.” They may operate in any number of building structures, whether stand alone or as part of a complex.
The Major Types of CRE Leases
There are several different types of commercial real estate leases, each with varying levels of financial responsibility for the business tenant. In all leases, the tenant is, of course, responsible for rent. In a single net lease the tenant is also responsible for paying property taxes. In a double-net lease, the tenant is responsible for handling property taxes and insurance. In a triple-net lease, the tenant pays property taxes, insurance, as well as maintenance costs on the building. In a full-service lease, the tenant’s lease covers the expenses like taxes, insurance and maintenance. In a gross lease, the tenant pays the rent in a lump sum. There are pros and cons to all types of leases, some the benefit the landlord, some that benefit the tenant.Navigating the landscape of CRE can be complicated for both investors and potential tenants, and trying to sort it all out alone can be extremely overwhelming. If you are looking to buy or lease commercial real estate in the North Hills of Pittsburgh, contact the professionals at ACRES for a consultation today.