How much do you really know about the property that surround us? Specifically, how much do you know about commercial real estate property?
Most people aren’t super familiar with commercial real estate, or at least beyond a basic understanding. In reality, there’s a lot to learn about commercial property and commercial buildings, especially if you are interested in entering the building trade or you would like to go into real estate.
Are you ready to learn more about the different types of commercial real estate? If so, keep on reading.
What's In This Article
What Is A Commercial Property?
First, you may be wondering what exactly a commercial property is. How does it differ from somewhere that you live?
Commercial property definition
A space that allows a company to carry out business operations and serve a client or customer.
A commercial property is essentially a location – generally a building – where a particular company can do their business. It’s somewhere that they can conduct their everyday operations, whether that’s in an office or in a people facing service such as a restaurant.
So can any building where a person does business be classed as a commercial building? For example, a temporary office trailer. Well, not exactly. For instance, if you have a large building with multiple floors and rooms, but some of those floors contain apartments where people live, that building could not be classed as a commercial building. This is because the building has both commercial and residential use, in which case it is not solely designed for the purpose of a company – or companies – generating income.
As such, if you wanted to buy a commercial building for your business, it would usually be best to speak to a commercial real estate agent.
A space where an income is generated
In addition to that, a commercial building is somewhere where a company can generate income for their business. In these properties, approximately half of the property is being used for money generating activities. This could be retail, food services, or providing other spaces.
Commercial vs. Residential
As we have already alluded to, a commercial property is quite different from a residential property. In fact, both of these buildings are also constructed in different ways too.
Residential buildings refer to buildings designed to be lived in
A residential building, as you can probably imagine, is a location in which families or individuals can live. In most cases, they are buildings that dedicate more than half of the floor space for people to reside in. A residential property will usually provide places where people can sleep and can do things like cooking and places where they can relax.
There are a number of different kinds of residential buildings. Houses are the most popular kinds of residential buildings, but they are by no means the only ones. Here are some residential buildings out there that you may encounter:
- Houses and private properties – these are generally smaller buildings that are owned by an individual or a particular family. They can vary in size from smaller homes to large mansion-like buildings. If there are multiple families living in a house though, this would instead be known as a multiple family private dwelling.
- Apartments – Apartment buildings usually contain a number of floors of rooms where people can reside. They are buildings where multiple families or individuals can reside separately from one another. You will often see them in large city centers, though they can be found pretty much anywhere that you can think of.
- Rooming or Lodging House – this is generally a cluster of buildings that are all owned by one person or management. They provide lodging separately for individual people. Sometimes you can stay in these houses just on a short term basis, but it is also possible to live in one full time.
- Dormitories – These are buildings where a variety of people can live and sleep at once. They’re generally designed for military personnel or for schools, such as college dorms.
- Duplex, Triplex and Fourplex – these are generally houses that have two or more living units side by side, usually conjoined. Two families can stay here, or more if it’s a triplex or a fourplex. You can also get condominiums, where residential areas are sometimes stacked on top of each other in the same way as with an apartment.
The lines can get a little murky, however. For instance, in general a larger scale apartment complex would actually be classed as a commercial property since the space inside of them would be let to other people because it is run as a rental business. In this case, the apartment building itself generates income for a person or an organization.
Commercial buildings are more varied than residential buildings
As you can see, there are many different kinds of residential buildings out there. With that being said though, there is far more variety on offer when it comes to commercial buildings. With a residential building you are solely required to use them for the purpose of providing living quarters for individuals or families.
A commercial building can be used for pretty much anything so long as it generates income. As long as the purpose of the building is to conduct business activities, it can be considered to be a commercial building in most places. As such, there is a lot more flexibility in terms of what kinds of commercial buildings are out there. For instance, medical facilities and bakeries could both be considered to be commercial buildings.
Commercial and residential buildings are built differently, using different materials and infrastructures
Another thing worth noting is the residential and commercial buildings also aren’t built in the same way. They are usually made from different materials, and the legal aspects around constructing the buildings can differ too.
For instance, you will need a permit to build both a residential building and a commercial building. The regulations between the two will be different though. In some respects commercial construction can be more complicated as there are usually more regulations that need to be followed.
When building a commercial property, a contractor will need to follow the procedures for the electrical systems, plumbing, construction techniques, size, design and the materials used. Considerations also need to be made for things like the IT, accessibility concerns, elevators and parking options.
There are a lot fewer regulations that need to be followed when you are building a residential property, though health and safety guidelines still need to be strictly followed.
In terms of the material, the vast majority of residential buildings will be made out of timber frames. This is because the timber is usually much cheaper and it is also the material that makes the most sense for a building that’s on the smaller side.
The same cannot be said of a commercial building which is generally made out of steel instead. This is because timber isn’t strong enough to support buildings with multiple levels, so a stronger material is often needed. There may be situations where steel is sometimes used to construct a residential property, but it’s rare that you will find a commercial building constructed out of timber since the design tends to be much more complex for commercial buildings.
Thanks to both of these things, commercial properties usually cost a lot more to construct than residential properties. Commercial projects will generally require funding from the bank, the government or from a person or company with a lot of wealth to spare. If you’re planning on building a residential property, this will usually be paid for from your own pocket. It is sometimes possible to get funding for a residential property too, however.
They can sometimes take longer to build too, though this is not always the case and it can depend on the size of the project in question.
Different Types Of Commercial Properties
There are a number of different kinds of commercial properties out there, so it’s a good idea to make yourself familiar with them. Here are the different types of commercial properties and the things that you need to know about them.
Class A buildings
Most commercial buildings will be grouped into one of three categories – class A, class B and Class C buildings. It’s worth noting that sometimes the classifications can vary depending on the market. The criteria is used to differentiate between different kinds of buildings. There’s no strict way of defining the classification of a building, but there are some general guidelines worth noting.
The first type of building is a class A building.
If you are in the market for a commercial property space that is the best that you can get, then you need to make sure that you are on the lookout for a class A building that you can use. These buildings are pristine, generally have been built fairly recently and are unsurprisingly rather expensive to lease. In most cases, these buildings have been constructed within the last 10 to fifteen years. These properties are usually reserved for the kinds of tenants that have good reputations and that are very well known.
Class A buildings are seriously high quality. They tend to be located in busy areas where business is likely to be booming. This includes places like streets that get a lot of traffic and in city centers. They are often managed professionally, requiring very little maintenance on the part of the tenant.
They often have the best amenities that you can imagine too. If you are looking to rent a commercial space in one of these buildings, you can be sure that you will be working in the best possible conditions. These buildings will include the latest, state of the art technology, will usually have security, high quality parking facilities, and sometimes will even have services like fitness centers, restaurants and dry cleaning services built in!
Class B buildings
One level down from class A buildings are class B buildings. That’s not to say that they are bad buildings, of course. They generally just aren’t quite as elite as the class A buildings, which can be quite challenging to get into since spaces in them are often limited. They also don’t cost as much money either.
These buildings tend to be a little bit older than class A buildings, generally older than around 10 to 15 years. These buildings tend to be sought after by investors since they are older, and investing in them can usually yield a decent return on investment if the right renovations and upgrades are completed. You could turn a class B building into a class A building with the right upgrades.
A class B building is one that has usually been well maintained and is in good condition, despite its older age. They function well for people who are looking for the right office space. They have decent safety and security systems in place, and the electrical and mechanical components are up to date. They can be used by a wide variety of different users, and the lower cost means that they are much more accessible even for smaller businesses.
These buildings are usually in decent neighborhoods, though not in the prime locations where you would find class A buildings, such as on the waterfront or in busy city centers.
Class C buildings
The last option is a class C building. This is the lowest building classification in terms of commercial real estate. As you can imagine, the quality is also the lowest of the three too. Class C buildings are usually ones that are quite old, usually older than 30 years. The condition can range from fair to quite abysmal.
These buildings usually are not located in prime locations. In fact, most of them are in undesirable locations, such as random streets that are hard to access or in older parts of a city.
In terms of the architecture, these buildings are certainly not comparable to class B or A buildings. The architecture and construction of these buildings is usually rather outdated, and the same can be said for the technology inside.
The mechanical, plumbing, electrical, security and the safety elements of the building are all likely to be very outdated thanks to how long ago the building was actually constructed, since building regulations can change fairly frequently.
These types of properties aren’t totally undesirable to tenants, but they aren’t the first choice for many. Since the buildings are so outdated they often require much cheaper rent, making them appealing to businesses that are looking to get on their feet for the first time or who aren’t generating large amounts of income just yet.
It can sometimes be difficult to get tenants for these buildings, making them a risky option for investors or building owners. In most cases, owners of these buildings are going to need to make significant changes in order to draw in new tenants. There is potential to make a class C property into something truly amazing though, if the owner has the right vision and capital to invest into it.
Office buildings are some of the most commonly seen commercial buildings out there. As we have previously discussed, office buildings are categorized into one of three categories: class A, class B or class C buildings. The classifications are relative to one another, though the criteria is mostly the same in every situation.
You can get a lot of different types of office buildings. You can find office buildings that are located in a CBD, for instance – a central business district. These tend to be found right in the middle of a city, so are prime locations for generating business. In some much larger cities these may be located in high rise buildings in downtown areas, however.
Alternatively, there are also suburban office buildings. As the name suggests, these are generally found in suburban areas and they sometimes include mid rise structures that take up roughly 80,000 to 400,000 feet. They are found outside of the center of the city. You may sometimes find them in designated business parks surrounded by other similar office buildings and even modular office complexes.
As with any commercial building, you are going to need to get a commercial building permit in order to build one of these properties. If you are building the office from scratch then it may also be a good idea to get someone to survey the land to ensure that there aren’t any reasons as to why you may not want to build an office in the area. Getting a good contractor and designer is necessary too.
When finding somewhere for your office space, it’s a good idea to ensure that you choose the right location for your building, consider the parking and consider where the utilities are. It’s often helpful to get a professional to give you guidance with this.
Another commonly found type of commercial building is the retail building. Retail buildings, as you can probably imagine, are properties in which businesses or individuals can sell items. This can include things from clothing items to toys, and pretty much anything in between that you can think of that is legal to sell in that specific state.
There are a lot of different kinds of retail properties out there that you can build. The first is the strip or shopping center. A strip center is a smaller kind of retail property.
They sometimes have anchor tenants though this is not always the case. In case you were wondering, anchor tenants are bigger retail tenants and these are there to bring more customers into the establishment in question. In most cases these kinds of establishments will consist of some smaller retail stores and some bigger ones. They house a variety of different retail tenants.
You can also have community retail centers. These are pretty large locations that demand a surface area of around 150,000 – 350,000 square feet. You will usually find a number of different anchor tenants in these locations, and some businesses that you may find here include drug stores and grocery stores.
Sometimes there will also be restaurants in the community retail center which will draw in even more business when the customer has finished their shopping.
There are also power centers too. These tend to have a number of different retail stores in them. These are usually small scale businesses but there will usually be some bigger major retailers too. Power centers can take up a lot of space, but the big box retailers within them can take up anywhere from 30,000 to 200,000 square feet.
A regional mall is one of the biggest kinds of retail establishments that you can get. These establishments may take up as much as 400,000 to 2,000,000 square feet in real estate, and these centers will usually contain high end, popular retailers.
Many of the establishments listed above will also contain ‘out parcels’ too, and these are areas where sole tenants like banks or fast food establishments can set up their business alongside the retail center.
Industrial buildings are designed for manufacturing products and services, or are sometimes used for storing things like materials and goods.
Industrial buildings can vary in terms of their size, and there are a number of different kinds of industrial buildings out there.
You may find heavy manufacturing industrial buildings. The vast majority of bigger manufacturers are housed in heavy manufacturing buildings. They tend to be armed with a lot of specific equipment and machinery designed for higher end users. They are usually designed specifically for the tenant in question, and would require a lot of redesigning for a new client.
There are also light assembly buildings that are more simplistic in terms of design and can be used for a variety of different kinds of clients. Flex warehouses are similar in the sense that they can easily be converted for different purposes.
You can also get bulk warehouses that are huge, generally taking up around 50,000 to 1,000,000 square feet worth of space. These are used to distribute products throughout the region and need to be large in order to allow tracks to get in and out of them easily from the highway system.
Though technically not fully a commercial building, multifamily properties can sometimes be a good middle ground between commercial and residential properties, and can indeed generate income for an individual if you invest in them. There are a few different kinds of multifamily properties, and in the case of things like apartment buildings you can also include other amenities to generate income such as restaurants, dry cleaners and more.
Storage units are a form of commercial property that are often used by large buildings, though they can be rented by individual clients too. These can be used to store large amounts of items, or can double as a warehouse for a business. Unsurprisingly they can vary in size, with some of them being very small and some of them being larger than 100,000 square feet. Most people will rent these units, and they can generate a lot of income for the owners as a result.
Some land is also classified as commercial property. For instance, you can have greenfield or agricultural land. This kind of land is basically land that has not been built upon where activities such as farming take place. They are often areas that can be used for pasture for animals. Greenfields include things like orchards, ranches and animal farms, among other kinds of businesses.
There’s also infill land. You will usually find this in a city location and it may have been developed previously but there’s nothing there at present. It’s the kind of land that’s ideal for developing real estate.
Finally you have brownfield land. Brownfields are pieces of land that used to be used in industrial or commercial settings, but the previous buildings have usually since been demolished and are available for repurposing.
Finally are medical centers. These are commercial properties where medical examinations and procedures may take place. These may be private establishments like doctor’s surgeries, ultrasound clinics, dentists and any other kind of property that is used for medical purposes.
Commercial Real Estate Business Model
There are a few additional things that are worth knowing when it comes to the real estate of commercial properties. Consider the following:
Commercial property leases are generated per square foot of space.
As you can most likely imagine, no two properties are the same in terms of the lease. You may find two class A office buildings for instance and the rent costs are totally different prices. This may be because you would get more square food space in one of them than you may get in the other.
Generally speaking, the more space you are looking for, the more it is going to cost in order to lease it. If you are unsure about what the lease cost is likely to be for a particular property, you can usually find lease cost calculators to help you to work it out.
Calculated by building classes.
Unsurprisingly, the cost of the space that you are renting is going to be determined based on the classification of the building. Here, it’s important to remember the different building classifications that we mentioned earlier – class A, class B and class C buildings.
Since class A buildings are elite and designed to be pristine, with the latest technology and amenities, you can’t expect the lease cost to be the same as what you would pay for a class C property, even if the square footage is exactly the same. A class A property is simply going to offer more to its tenants and comes with a certain prestige, whereas a class C property is not going to provide that.
In short, it’s unlikely that you would find a class C or B building that costs more money than a class A building, both to rent or to buy outright if you are an investor. Though, it’s worth noting that the price may increase or decrease depending on where the building in question is located. A building on the waterfront will probably cost more money to lease than a building in a side alley, for instance.
Commercial properties are usually funded by bank financing, government agencies or wealth owners/developers.
If you are thinking of buying a commercial property, there are a number of options available to fund it. For starters, you could get a bank loan. With these you can get the funding that you need and will be required to pay it back on terms that work for both you and the bank. They’ll usually look into things like the company cash flow, personal credit and finances and whether the investment is going to be a good return on investment for them.
It’s also possible to fund the commercial property by raising private equity capital. With this, investors will help you to fund the property, but you will eventually need to split the profits with other investors.
You can also finance the real estate yourself. In this case you will likely need to make a down payment. It’s worth speaking with an attorney to draw up a contract for this if you plan to finance it with another person.
That’s everything you need to know about commercial properties. They can seem a little complicated to understand at first, but it’s not too difficult when you’ve mastered the concepts.
Just reread the information listed above and you will be an expert on commercial real estate in no time!