What is Commercial Real Estate?
Commercial Real Estate (CRE) refers to real estate assets that are used for business or commercial purposes. As such, tenants in CRE assets typically conduct income-producing business activities.
Table of Contents
- Commercial Real Estate Leases
- Types of Commercial Real Estate
- Commercial Real Estate Investment
- Commercial Real Estate Management
- Pros and Cons of Commercial Real Estate
- Conclusion
Commercial Real Estate (CRE) refers to real estate assets that are used for business or commercial purposes. As such, tenants in CRE assets typically conduct income-producing business activities. CRE assets can range from single units with one tenant to massive shopping malls or office towers with multiple tenants varying in size and category.
Examples of CRE assets include restaurants, healthcare facilities, office buildings and resorts.
Commercial Real Estate Leases
While some businesses may own the properties on which they operate, more often than not the space is instead leased out to them. Commercial lease lengths are typically longer than residential leases and range from one to ten years, compared to month-to-month or yearly leases for residential properties.
As such, most commercial leases have rental rates quoted at an annual rate in dollars per square foot ($/sqft), rather than a monthly per unit rate typical of residential leases.
The main types of commercial leases are gross leases, single net (N) leases, double net (NN) leases, and triple net (NNN) leases, which distribute the responsibilities of different property expenses to either the tenant of the landlord.
| Lease Type | Landlord pays: | Tenant Pays: |
|---|---|---|
| Gross Lease | Property Taxes Property Insurance Maintenance Fees |
Rent |
| Single Net Lease | Property Insurance Maintenance Fees |
Rent Property Taxes |
| Double Net Lease | Maintenance Fees | Rent Property Taxes Property Insurance |
| Triple Net Lease | - | Rent Property Taxes Property Insurance Maintenance Fees |
Types of Commercial Real Estate
The main classes of Commercial Real Estate are office space, industrial properties, multifamily rentals, and retail space, based on their practical functions. However, these categories may be subdivided further.
For example, office space may be classified as Class A, Class B, or Class C office space, depending on the quality, location and age of the property. This in turn influences the strategy an investor may apply for such an investment.
Read also: An Analysis of COVID-19’s Impact on Office Real Estate Demand
Commercial Real Estate Investment
Commercial Real Estate investment refers to investment in any form of real estate used for commercial purposes. Investors in commercial real estate stand to gain returns from both capital appreciation and rental income, depending on the investment strategy used.
As with most forms of real estate investment, Commercial Real Estate investments can be direct or indirect.
Direct property investment refers to property investment in which the investor becomes a direct owner of the property. This often requires the investor to have considerable knowledge of the real estate industry or to leverage on the expertise of real estate professionals who have this knowledge. These individuals tend to be high net worth individuals or accredited investors, since direct commercial property investment often requires a significant amount of capital.
However, other forms of direct property investment, such as real estate co-investing, are growing in popularity. This allows investors to invest in real estate assets through co-investment firms, which handle most of the property management and administrative aspects of real estate investment.
Indirect property investment is also another common form of real estate investing, and may come in the form of Real Estate Investment Trusts (REITs) or mutual funds that invest in real estate stocks. These properties may be diversified across different sectors, or specialised in commercial real estate, such as Keppel REIT.
Read also: An Overview of Institutional Investors
Sign Up at RealVantageCommercial Real Estate Management
Commercial Real Estate investment is typically more hands-on than residential real estate investing, since they are often larger in size and have more tenants than the latter. As such, owners of a commercial property may consider outsourcing the management of the property to a commercial real estate management firm, who will be responsible for sourcing and communicating with tenants, keeping up with leases and financing, as well as the maintenance and profitability of the property.
Pros and Cons of Commercial Real Estate
Commercial Real Estate as an asset class provides investors with a good opportunity to diversify their assets and invest in a property type with the potential for higher returns. Commercial Real Estate can provide investors with returns through capital gains and consistent rental income.
Leasing rates also tend to be higher than that of residential real estate, while their typically longer lease lengths provide more stability for investors. The flipside of longer lease lengths for commercial leases is that landlords are locked into the rental rates and review periods stipulated in the leasing agreement.
Read also: Investing in Australian Residential Real Estate
Commercial Real Estate investment also brings with it other risks specific to the asset class, the first of which is vacancy or tenant bankruptcy risk, where the property may have vacancies with little notice and rents unpaid due to sudden business closures, particularly for smaller businesses.
Another risk is that of increased costs due to refurbishments for new tenants, as typically commercial tenants have personalised spaces. These costs are at times borne by the owner as an incentive to attract new tenants.
Conclusion
Commercial Real Estate can be a profitable investment option, provided that the investor understands the risks involved and has the knowledge required to reap the benefits effectively. This often requires consultations or advice with third parties in order to maximise the success of the investment.
RealVantage is a co-investment platform that gives individual investors access to these larger Commercial Real Estate deals sourced by industry experts. In addition, co-investment pools funds from many investors, providing each investor with partial ownership of a property without the hassle of managing the asset.
About RealVantage
RealVantage is a leading real estate co-investment platform, licensed and regulated by the Monetary Authority of Singapore (MAS), that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.
The team at RealVantage are highly qualified professionals who brings about a multi-disciplinary vision and approach in their respective fields towards business development, management, and client satisfaction. The team is led by distinguished Board of Advisors and advisory committee who provide cross-functional and multi-disciplinary expertise to the RealVantage team ranging from real estate, corporate finance, technology, venture capital, and startups growth. The team's philosophy, core values, and technological edge help clients build a diversified and high-performing real estate investment portfolio.
Get in touch with RealVantage today to see how they can help you in your real estate investment journey.
Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.