Commercial Real Estate Investment: A Comprehensive Guide


Commercial real estate (CRE) refers to properties that are leased for business purposes with the intention of earning rental income and capital appreciation. Investors can purchase a property or invest through publicly traded real estate investment trusts, or REITs, which are the primary vehicles for investors to access this asset class. Commercial real estate can offer higher returns than residential real estate, but it is more complicated to own and requires more sophisticated financial expertise. Its price movements tend to have less correlation with the overall stock market, making it a useful component of an investment portfolio.

Purchasing commercial real estate typically requires more capital and expertise than purchasing residential property, as it can cost millions upfront to acquire a large-scale building. The purchase process is also typically more complex, with longer closing timelines and more people involved. Investors must complete due diligence to assess the local market, review financial projections and ensure the property is a good fit for their portfolio. Read more

There are eight main types of commercial real estate: retail, office, industrial, multifamily rentals, land, mixed use and special purpose. Each type of property has its own operational quirks, risk profile and return potential.

Office buildings house the administrative and support functions of companies. They include corporate headquarters, office buildings and business parks. The type of tenant and the nature of the work performed within the building determines the rent rate. Office buildings are often more insulated from economic cycles than other commercial properties and have lower vacancy rates.

Retail properties, on the other hand, are primarily occupied by retailers that sell goods directly to consumers through a storefront. Retailers are highly sensitive to consumer discretionary spending levels, and their traffic is closely tied to macroeconomic factors.

While some investors own their commercial properties, it is more common for them to lease space. This allows investors to diversify their holdings and reduce the risk that a single property will be negatively impacted by a change in local demand. Leases for commercial space are typically much longer than those for residential rental property, and they are more likely to be net leases, which transfer expenses from the landlord to the tenant.

Other commercial properties include laboratory space, distribution centers and other warehouses, retail shopping malls, cold storage facilities, affordable housing and parking garages. Miscellaneous properties also include churches, aquariums and movie theaters.

Although direct investments in commercial properties require more expertise and capital than residential investment opportunities, the average person can still get a foot into the door of CRE by investing through REITs. These are companies that own, operate and finance commercial real estate properties or provide services related to CRE. They are usually publicly traded, making them more accessible to individual investors than private equity firms and private equity funds that specialize in CRE. Alternatively, individuals can purchase shares of an exchange-traded fund that tracks the performance of the underlying REITs. NerdWallet writers are subject matter experts and use primary research, government sources, academic research and interviews with industry professionals to produce objective content.


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