Unlike fix-and-flip residential properties, commercial real estate investments often have 2+ year hold periods and typically attract steady income-producing tenants. These factors can provide stability through economic cycles.
In addition to office buildings, retail shops, warehouses and industrial spaces, other types of commercial property include mixed-use developments and special purpose properties such as churches, self-storage facilities and amusement parks. Contact Commercial Real Estate Las Vegas now!
Whether you work in an office, retail or industrial setting, chances are your daily routine takes you through buildings that house commercial real estate. This real estate is typically rented out to businesses and organizations that conduct business operations, such as banks or law firms. Office property can range from small spaces to large buildings occupied by multiple tenants, and is usually classified into three categories: Class A, class B and class C.
As the world’s economy slows down and companies shed jobs, demand for office space has fallen, sending property values tumbling. The drop is a blow to global investors who piled into offices in cities from Los Angeles to New York because they were seen as a super-safe alternative to bonds. It’s also a major headache for lenders, which are loaded up with loans that may now be worth only a fraction of what they were when they made the mortgages.
Many different types of real estate fall under the commercial umbrella, including industrial property, retail properties and multifamily properties (anything with four or more residential units). Investors often buy and sell these assets to take advantage of rising or falling prices and the potential for higher rental income. But investing in any type of real estate requires careful research and due diligence to make sure the investment will be successful.
In addition to evaluating market trends and location, investors must consider the type of property they’re purchasing as well as their own knowledge, expertise and resources. This is because the buying and selling process for commercial property can be more complex than for residential real estate, with more legal and financial paperwork.
The investment in residential real estate is considered a safer bet than commercial, because people will always need places to live. However, the returns on a residential property can be lower than for a commercial building because there is less of a demand for housing. This makes it more challenging to find and keep tenants, and may result in long periods of vacancy for the landlord. A skilled landlord can manage these challenges by offering competitive rent pricing, providing quality amenities and keeping up with maintenance.
Retail
Commercial real estate encompasses property used for business purposes, including offices, stores, restaurants and industrial sites. It’s a lucrative long-term investment for individuals and companies, as it generates income through leases or sales of spaces. It’s different than residential real estate, which consists of homes where people live.
There are many ways to invest in commercial real estate, but one option is to purchase a space directly. This is called direct investment, and it’s a good option if you have access to enough cash and knowledge to purchase and manage properties yourself. Another option is to invest in a REIT, which holds or invests multiple properties. This can be a good option if you don’t have the capital to buy your own property, but it also comes with more risk because of the number of properties under management.
Retail is a vital part of the commercial real estate market. It includes everything from shopping malls to standalone neighborhood boutiques. While some retailers own their own buildings, it’s more common for them to lease from an investor or property management company.
Because of their location, proximity to customers and a wide variety of businesses, retail spaces are generally more expensive than office space. They may also have a longer lease term than office space. These factors can make them more at-risk during economic downturns.
While no type of real estate is exempt from risks, commercial spaces face more than other types of properties. These include natural disasters, vacancies and tenant issues. The good news is that many of these risks can be mitigated with proper planning and preparation.
During the pandemic, retail demand held steady or even grew in some markets, demonstrating the resiliency of this sector of the market. The key to retail success, however, lies in understanding how consumers have shifted their behaviors and expectations. Then, retailers can focus on strategies that will ensure they remain relevant and profitable as consumer habits shift again. This will be particularly important as distributed work continues and COVID-19 subsides.
Industrial
As its name suggests, commercial real estate is a type of property that is used to conduct business and generate income for the owner. Unlike residential property, which is typically built to provide housing for people, commercial real estate is designed primarily to make money through either rent or sale. Common examples of commercial properties include office buildings, stores and warehouses. Investors can invest directly in the commercial market by purchasing or leasing space for their own use, or indirectly by investing in market securities such as real estate investment trusts (REITs) and exchange-traded funds (ETFs).
While most investors think of industrial properties as large brick smokestack buildings that house factories, this type of property encompasses a wide range of spaces. These can include light or heavy manufacturing, warehouses, distribution centers (large and small), logistics facilities, “flex” space that includes some combination of industrial and office uses, showrooms and even self-storage properties. Depending on local zoning laws, the activities that take place on these types of properties can vary widely.
For example, a research and development property will usually contain labs and testing spaces for new products and prototypes. This type of property often requires specialized wiring, security and cooling systems. A data center is where a company keeps its information technology equipment and can require extensive cooling and security. Light and heavy manufacturing facilities need tens of thousands of square feet of space, three-phase electricity, plenty of loading docks and the ability to run high volumes of machinery.
These types of properties are typically located outside of urban, shopping and residential areas, where they can be shielded from the noise and nuisances that may disrupt abutting residents living in single-family homes. They also must meet strict zoning requirements that dictate what types of businesses can operate there.
Other types of commercial real estate that don’t fit into a specific category include hospitals and self-storage facilities. These types of properties can also be highly profitable, though their return on investment is typically more gradual than that of other commercial property.
Multi-Family
Investing in multifamily real estate offers consistent cash flow, diversified income streams and higher appreciation potential than single-family rental homes. However, the costs and maintenance requirements of this type of investment can be significant. Fortunately, there are several ways to start investing in multifamily properties. These include purchasing a duplex, buying a condo or investing in an apartment building.
Multifamily properties are a residential property type that includes buildings with two or more housing units. These structures typically share walls and roofs, utilities and other common areas. They also may have shared amenities like parking garages, gardens and playgrounds. Multifamily real estate is a broad category that encompasses townhomes, condominiums, apartment complexes and build-to-rent (BTR) or build-for-rent communities.
While the majority of commercial and residential properties are multifamily, not all are. To be classified as a multifamily, a property must meet specific guidelines. For example, it must have at least two residential dwelling units and be a separate structure from the owner’s residence. It also must have separate entrances for each unit. In addition, a multifamily property must be in an area with a high demand for rental units.
In addition to the increased upfront and back-end costs, there are other factors that make investing in multifamily properties more difficult for beginner investors. For one, vacancies significantly reduce returns, as they require the owners to pay for all of the expenses associated with a property while it’s unoccupied. The expense of finding tenants and the additional cost of managing the property can also eat into an investor’s bottom line.
To overcome these hurdles, it’s important to partner with a knowledgeable real estate agent who understands the local market and current housing trends. These professionals can assist with financing options and provide expert recommendations on how to purchase and manage a multifamily property. They can also help you understand mortgage programs and regulations. Rocket Mortgage(r) offers a range of residential loan products that are suitable for many types of multifamily properties.
As with any type of investment, success relies on choosing the right strategy and then executing it well. Successful real estate investors think strategically and diversify their holdings to mitigate risk. Ultimately, it’s all about balancing the right mix of assets to generate the most consistent and sustainable return on investment.