Despite being a term bandied about the media landscape, a large number of people are usually surprised to learn just what commercial real estate is and what it encompasses. It’s a subject the team at ML Group knows a thing or two about, and to lessen any confusion, we’d like to set the record straight on a few commonly misheld notions and provide a basic primer of all things CRE.
What CRE Is, and What It Isn’t
Commercial real estate generally encompasses six basic categories: Office buildings, retail/restaurant, undeveloped land (intended as investment properties), multifamily (such as apartments or hi-rises), and industrial. The sixth and final category is a bit of a catch-all, an undefined, miscellaneous category that includes whatever doesn’t fit in the other buckets, such as hospitals, outpatient clinics, or storage facilities.
One of the most frequent mistakes we see is industrial real estate named not as a subcategory of commercial real estate (which it is), but rather its own entity (which it’s not). All CRE property is concerned with or engaged in commerce, so they’re similar in that regard; the main difference is that industrial real estate is used for the purpose of manufacturing, such as cold storage or refrigeration buildings, factories, R&D buildings, or telecom and data hosting centers.
Why CRE Is Always a Good Investment
Ever on the hunt for opportunities, some enterprising individuals have “bought up” large tracts of land on the moon, lest commercial enterprises arise down the road. Yet while the Moon Treaty and Outer Space Treaty would prevent anyone making a claim from ever seeing a cent on the first Lunar Starbucks, terrestrial land is always a good bet.
Property that can be rented to others – whether in the form of apartments or office space – isn’t dependent on a good or service, unlike other types of investments. Commercial real estate is a limited resource asset, and if it’s in a good location, there is always potential.
“Case in point: The Empire State Building earns more from selling tickets to the observation desk than it does from renting office space.”
The hallmark of commercial real estate is that it’s a consistent income producing commodity unlike stocks, which may or may not pay dividends and are prone to the mercurial fluctuations of the market. Commercial real estate, on the other hand, is based on strong, persistent demand that meets either a need for housing, basic services or storage.
The Who Caused What?
There are two core tenets regarding commercial real estate that are sacrosanct: There will always be risk involved, and there is never a single defining factor that affects the value of a commercial real estate property.
A property’s valuation will never be raised solely due to its location, just as one will never see a dip only because of the state of the economy. While decidedly important factors, it’s a combination of those things along with other factors like demographics, physical condition, usage and modification restrictions, maintenance costs, and nearby comparable properties (among many others) that really affect a property’s value. It’s the sum of the parts that make the whole, and especially with commercial real estate, there are always going to be other mitigating factors.
Location, Agitation, Adaption?
While we’re on the topic of location, it’s time we question – if not outright lay to rest – the real estate gospel and its cliched use of it being all about location, location, location (and the usual CAPS LOCK that go with it).
Real estate is rife with stories about property’s in seemingly ideal locations that see their valuation plummet. Whether residential or commercial, location still matters, and may always be the most important factor to consider. But let’s remove the latter two “location’s” and instead remake the mantra location, price and timing. A property that’s more affordable, in an up-and-coming location, has a greater chance for success than basing a real estate decision on location alone.