What is Commercial Real Estate？

The real estate market is usually divided into two categories: residential real estate and commercial real estate.。

Residential property consists of properties specifically designed for habitation, such as houses, detached apartments and apartments。Due to zoning laws, residential properties cannot be used for business - you can occasionally hold yard sale events in your backyard, but you cannot run a restaurant outside your basement。

Commercial property consists of properties designed to make money or provide a place for others to make money, such as office buildings, restaurants, shopping malls, and apartment buildings。

The distinction between the two can be a little blurry, especially when it comes to apartment buildings。People live in apartment buildings, but no one buys an entire high-rise just to live there - they try to make a profit by renting out individual units to others。The units themselves are residential properties, while the entire building is treated as commercial property.。

Commercial real estate has traditionally been divided into four categories:

Multifamily homes: These are apartment complexes and other properties with multiple living units, and multifamily buildings must have five or more living units to be considered commercial real estate。

Office buildings: Companies buy or lease office space to provide a place for employees to work and collaborate。Office buildings usually provide investors with stable income because companies do not move offices frequently.。Office buildings are roughly divided into the following categories:

• Class A Building: The highest quality building in the most desirable location with the widest range of facilities such as fitness center, garden, roof, etc.。
  
• B-level buildings: General or older office buildings with fewer facilities and less luxury, usually located in areas with less demand, such as suburbs or small towns。
  
• Category C building: A low-quality office building in an undesirable location, usually at least 20 years old, that may require extensive renovation。
  

Retail: This category includes all property of businesses used to sell products to consumers, such as stores and restaurants。Retail properties include shopping centers, high streets, single storefronts and restaurant spaces。

Industrial: Industrial property includes all real estate used for manufacturing or large commercial storage, such as warehouses or manufacturing plants。Industrial properties are usually located outside residential, shopping and commercial areas and are subject to strict zoning regulations, usually occupied by a single tenant or business owner.。

Some buildings do not belong to a certain category.。Hospitals and self-storage facilities, for example, do not fall into any of the above categories but are still considered commercial property because they are used to conduct business rather than provide housing.。

Similarly, mixed-use developments combine different types of properties into one。For example: a combination of an apartment building and a shopping centre to provide tenants with a separate living area for easy shopping and access to restaurants。

Advantages and Disadvantages of Investing in Commercial Real Estate

Compared to investing in the stock market, investing in any type of property has one main advantage: you are buying physical property。

When you invest in stocks, there is always a risk that the company you are investing in will fail and that the value of the stock may fall to zero。For real estate, even if the market changes, the property you own is still tangible and will always have value, which means that real estate can diversify your portfolio and spread risk across different types of assets。

However, commercial real estate has some unique advantages over residential real estate:

Longer lease terms: Unlike residential properties, tenants of commercial properties such as office buildings or shopping malls tend to live in them for long periods of time, which brings more stable cash flow to investors, with many leases lasting for decades.。

Higher return on investment: Commercial investments tend to have higher returns than residential real estate investments, mainly because of their longer lease terms and the number of tenants available。However, returns are affected by the market for commercial space in a particular region, such as how much space is available compared to space demand, and how the overall economy is doing.。

Capital Gains: When you buy commercial property, the value of the building you own may go up or down。Historically, despite intermittent downturns, the housing market has grown year after year。If this trend continues, the value of the building will increase and you can sell it for a profit。

But commercial real estate is not without its drawbacks:

Higher upfront costs: Buying a multi-family home is much more expensive than buying a single-family home。

Higher risk: Commercial real estate is usually a higher risk investment, not only because it has a higher upfront cost, but also because there are fewer potential tenants, which may make it more difficult to rent out space and recover costs。In addition, despite the longer lease term, the financial situation of the business may be worse than that of residential tenants with stable incomes, resulting in an increased risk of tenant loss。This is especially true during the economic crisis, which may hit retailers and other businesses hard first, but residential tenants still need a place to live.。

How to Buy Commercial Real Estate？

Investors can invest in commercial real estate in two ways:

• Direct Investment: If you can afford it, you can purchase commercial real estate outright or finance it through a loan. Since commercial real estate is a risky investment, this route is best suited for investors with extensive experience in the industry.

• Indirect Investment: Most people who invest in CRE do so through a real estate investment trust (REIT). These companies are real estate portfolios that generate profits through rent payments and then distribute those profits to shareholders. Most REITs are publicly traded like stocks, making it easier for investors to buy and sell them.

What are the best commercial properties?？

No commercial real estate is suitable for all investors. Each type of real estate has its advantages and disadvantages. The best commercial real estate investment may vary depending on the region, market trends, and the knowledge, experience and resources of specific investors。

For example, since real estate is a highly localized market, investing in industrial property may make sense in one area but may not be ideal in another。