What is Commercial Real Estate? An Introduction
26 September 2021
Commercial real estate (or CRE) is non-residential property that is used as a workspace or for business purposes. Usually, the properties are leased out by the owner to individuals or businesses who use them for their commercial purposes.
Commercial real estate is a more complex market than residential real estate, but many investors are drawn to it as a way to diversify their property investment portfolio. Key advantages compared to residential property include higher yields, longer leases and the fact that it is the tenant’s responsibility to cover outgoings. However, there are also downsides such as a need for greater equity, higher interest rates on loans and potentially longer vacancy periods.
Commercial real estate covers a wide range of different property types, from small shops and restaurants to large office blocks, hotels, and factories. Here we take a look at three of the most popular CRE categories.
First time CRE investors traditionally often start with a small shop in a neighbourhood strip retail centre. However, these are increasingly being challenged by the mega shopping and entertainment centres owned by multi-national companies such as Westfield. Coupled with the growing popularity of online shopping, investing in retail property requires careful consideration.
Risks can be mitigated by looking for retail units with easy access and parking, few or no vacant premises nearby and close proximity to a well-known “anchor” businesses, such as a chain stores or supermarkets, that will attract footfall. A growing dislike by some shoppers of large impersonal shopping complexes might also be something local retailers can profitably tap into.
Office property can range from small single-tenant buildings in suburban areas through to high rise blocks in city centres. As tenants tend to be long-term, the security of cash-flow can make it an attractive investment.
Investment options include purchasing office property with existing tenants, repurposing an existing building into new office space or updating older office premises. However, the large amount of capital required to buy or develop an office building can put it out of the reach of many investors. A more affordable option can be buying a share of a large office building using a strata title that gives you part-ownership of the property.
Office space is classified according to age, facilities and location. Class A property is the most prestigious, with enhanced technology and amenities. Class B buildings are older and lack the most up-to-date features but can be attractive to smaller businesses who appreciate a lower rent. Class C represents more outdated buildings that are ripe for upgrading.
The industrial property market is generally considered to be the most stable of commercial property types as it is slow to be affected by changes in the economy. The best industrial property will have good road connections, be near centres of population, and offer staff amenities such as parking and food and retail outlets. There are entry-level investment opportunities in industrial strata units that form part of new industrial complexes.
The three traditional categories of industrial property (manufacturing, research and development and warehousing) are gradually becoming less distinct. As the economy moves away from manufacturing, there is a need for more mixed-use premises where a range of activities can take place under the same roof. Flexible facilities, with good internal roof height and easy access for trucks, make the best long-term investment.