What Is Commercial Real Estate?

The commercial real estate industry touches virtually every aspect of the economy,

from the restaurants and office buildings where employees work to the warehouses

that store products. Without it, companies could not operate, patients wouldn’t be

treated in hospitals and people wouldn’t buy goods from retailers. As such, it’s an

important sector that can offer lucrative investment opportunities. But what is

commercial real estate exactly? The term encompasses many different property

types and sizes, but they’re usually used to generate income through rent. The six

main types of commercial real estate are retail, office, industrial, mixed-use,

specialty and multifamily.

Investors can invest in commercial properties directly by purchasing a building

themselves or through indirect investment vehicles like REITs, crowdfunding or

private equity partnerships. Direct investing requires significant capital and typically

involves working with a broker to research options, choose a property and make a

purchase. For investors who don’t have the resources to take on this level of

responsibility, REITs and other commercial real estate investment funds can provide

access to diversified portfolios that minimize risk.

When a person or company needs space to sell or manufacture goods, they may

lease a warehouse or manufacturing facility. These are typically located in suburban

or rural areas and offer open or enclosed storage space, loading docks and ample

parking. Some warehouses also have climate control systems that allow tenants to

keep their products cool or warm as needed. Industrial property includes distribution

centers, flex facilities and light manufacturing buildings. These properties tend to

have larger floor plans than retail or office spaces and are often built on a more

Class A commercial property is high-end and well-maintained. It’s often found in the

best locations and features premium amenities, including a prestigious address and

secure parking. Class B properties are mid-range and offer a blend of value and

location. And Class C properties are older and may not have the latest in technology

or materials.

Multifamily properties include apartment buildings, condominiums and townhomes,

as well as manufactured home communities. This segment is booming, thanks in

part to the aging baby boomers and millennials who are looking for more affordable

housing options.

Specialty properties can be used for a variety of purposes, from churches and

aquariums to cold storage facilities and warehouses. These properties tend to have

the longest leases and are usually hard to adapt for other uses.

The demand for retail and office space tends to drop during economic downturns,

when businesses scale back operations or even go out of business. When this

happens, it can be difficult for owners to find new tenants and recover the cost of

their investments. As a result, these property types can experience slower growth

and higher vacancy rates than other sectors during downturns.