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By Jenn Walker
Are you interested in entering the world of commercial real estate (CRE) but don’t know where to begin? From the outside looking in, commercial real estate seems like a complicated net of real estate terminology and finance jargon that only those with strong business acumen can understand.
However, this is not the case!
Understanding the ins and outs of CRE investing seems daunting at first, but anyone can become knowledgeable with a bit of effort and time. This article will cover everything you need to know about CRE—from ways to invest to the risks involved—to better prepare you for entering this exciting industry.
What Counts as Commercial Real Estate (CRE)?
The standard definition of commercial property is property purchased to make a profit by leasing the space. In most cases, these properties are usually leased out to businesses. However, there is a special designation called commercial multifamily units leased to people.
The types of properties that count as commercial are diverse, but most commercial realtors find it easiest to break CRE into four main categories.
Multifamily CRE
As mentioned above, this type of commercial property covers apartment buildings, townhomes, or large houses broken into many units. To qualify as a multifamily property, these types of property must contain five or more separate units.
Office CRE
Office CRE is property leased to companies, businesses, and corporations. It is designed to act as a space for them to carry out all of the necessary functions of their business—think large bullpens, small offices, and other corporate facilities. Business parks, stand-alone offices, or shared office spaces all count as office CRE.
Sometimes the space is specially tailored to accommodate medical facilities or other appointment-based businesses. Think dance studios or doctor’s offices
Industrial CRE
Industrial CRE covers all of the warehouses, manufacturing plants, steel mills, oil refineries, and logistics companies. Other examples include waste treatment facilities and power plants. Big companies like Amazon or Ford are the likely tenants for industrial CRE.
Retail CRE
Retail CRE is what many people imagine when they think about CRE. This type of property sells space to businesses who use it to sell their goods, products, and services directly to consumers. These are the brick-and-mortar storefronts, the grocery stores, restaurants, and showrooms.
An easy way to envision the difference between office CRE and retail CRE is to think of the difference between a Walmart store and a regional Walmart HQ.
Mixed CRE
Some commercial properties mix and match the above types all in one. It is common to have a city skyscraper with apartments, office space, and retail space.
What Is The Difference Between Active and Passive Commercial Real Estate?
Now that you know more about the types of CRE properties, we can discuss the common ways people invest in them. Broadly speaking, investors categorize CRE investing by the investor’s level of direct involvement in making important decisions.
Obviously, the view on the ground has much more grey in it—active and passive investing sit on opposite ends of an investment spectrum. Most people fall somewhere between.
Active CRE Investing
This method involves a sole investor or group of investors purchasing, developing, and managing a property directly. Active investing is the most hands-on. Active investors have the most control throughout the investment, development, and management phases of owning CRE.
In exchange for a high degree of control, active investors must perform more of the work. Active investing is extremely time-consuming and often takes the full-time attention of a whole staff of strategists, analysts, lawyers, and other professionals to perform successfully at scale.
Passive CRE Investing
Passive investing is the option most people choose because—let’s face it—most people aren’t full-time real estate investors. Because investing successfully requires so much due diligence on behalf of the investors, most people who work other jobs would rather invest their money passively.
Passive investors lend their capital to companies that specialize in performing all of the duties that active investors perform and see annual returns on their investments. There are many ways to invest in CRE passively:
REITs and REIT ETFs
REIT stands for real estate investment trusts. REITs are publically traded companies that invest in, develop, and manage commercial real estate. Investors purchase shares of a REIT on the stock market.
This indirect investment strategy means the investor has little control over the REIT. They see returns on their investments as they would a stock. Investors make money when the REIT is successful.
Now for the confusing part…
An ETF is an exchange-traded fund. ETFs are funds—effectively, a fund means a company—that specializes in investing in publicly-traded companies. Investors can choose to purchase shares in an ETF rather than a stock.
The idea here is that investors are spreading out their risk by investing in funds that invest in other companies rather than investing in a sole company. In this way, the success of an investment is tied to the performance of a whole group of companies rather than one company.
REIT ETFs are ETFs that focus on investing in REITs. This is an even more diluted form of investment than investing in a REIT. It’s easier to think of investing in an industry rather than a company.
Commercial Real Estate Private Equity Firms
Higher-net-worth investors may choose to invest in private equity firms instead of going through the stock market. Private equity real estate firms are companies that perform all the tasks of a REIT, but the investor is considered a partner and has much more leverage in influencing decisions than with REITs.
Private equity firms are private, meaning they are more restrictive in who is allowed to become a partner. Usually, partners need to put up a minimum investment amount and be accredited.
Are You Ready To Begin Investing In Commercial Real Estate?
You are now armed with the knowledge you need to begin investing. Remember, you should never invest more than you are willing to lose.
Which CRE investment strategy is right for you?
About the Author
Jenn Walker is a freelance writer, blogger, dog-enthusiast, and avid beachgoer operating out of Southern New Jersey.
