What is Commercial Real Estate?
Commercial real estate, also known as commercial property, is a category of investment property utilized by businesses as a space to conduct operations. Commercial real estate offers a wide range of options, in contrast to residential real estate, which is mostly limited to homeowners or tenants who utilize properties as living space.
An industrial park full of warehouses, a medical institution like a hospital or surgery center, an office building rented to white-collar companies, a single-tenant retail building like a restaurant or big box store, or pretty much any other structure not used as a home can all be considered commercial property.
Who Pays Rent on Commercial Property?
All kinds of businesses rent commercial real estate. Although some businesses, organizations, and governmental bodies own real estate completely, tenants frequently choose to lease premises.
That’s because most businesses prefer the flexibility that comes with renting than being confined to one site for the foreseeable future, even though it may be more expensive in the long term. Many businesses would rather use their funds for operations than spend a large amount of money up front to purchase a costly property.
Commercial real estate is owned by who?
The majority of profitable commercial properties are huge and in congested urban regions, therefore the only investors who can afford to invest directly in commercial real estate are often well-funded businesses.
Take the renowned Empire State Building, one of the most prestigious and sought-after office buildings in the world, as an illustration. It is owned by Empire State Realty Trust Inc., a publicly traded real estate company, and is worth more than $2 billion.
Even many wealthy private investors find it impractical to directly acquire commercial real estate. This is especially valid when it comes to spacious, appealing residences.
How Can Commercial Real Estate Investing Be Done?
As a member of an investment group, there are numerous ways for investors to acquire commercial real estate or at the very least, obtain a tangential exposure to these assets. They consist of:
Crowdfunding. There are numerous crowdfunding platforms with a real estate concentration, including CrowdStreet, DiversyFund, PeerStreet, and Fundrise. Numerous small investors pool their modest funds in order to obtain exposure to commercial real estate.
Listed real estate companies. Many stocks own real estate, including the Empire State Realty Trust. In order to accommodate publicly listed commercial real estate companies, there is even a unique class of stock called real estate investment trusts, or REITs.
Funds for private equity. If you have a lot of money, you may have direct exposure to commercial real estate by contributing to a bigger, more exclusive private equity firm. Remember that private equity firms frequently require a minimum investment of tens of millions of dollars, with the most affordable funds requiring at least $250,000 from each participant.
Why Understanding Commercial Real Estate Is Important
Commercial real estate can help diversify your investment portfolio in several ways. All investments have some risk, however some forms of commercial real estate have very little risk when compared to other assets.
For instance, leases for commercial real estate are usually seven or even ten years lengthy. This greatly increases the dependability of landlords. Additionally, some commercial real estate investments can withstand recessions since their tenants frequently include hospitals, governmental organizations, and other establishments that will continue to function even when the general economy is unstable. Additionally, you won’t find the same level of security in other categories of discretionary spending as you will with rent payments because of their regular income flow.
There are several commercial real estate investments available that frequently outperform other assets over time, though you should always conduct your own research before making any investment.