Commercial Real Estate Definition and Types

If you don’t understand the basics, you won’t succeed. Every successful person’s achievements are built on a foundation of knowledge and experience. Without that foundation, it’s impossible to make informed decisions, and success becomes a distant dream.

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Hence, understanding the basics of commercial real estate (CRE) is essential. This includes knowing what commercial real estate is and recognizing the different types of commercial properties available. Learn the basics of commercial real estate first, and you will succeed!

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What Is Commercial Real Estate?

Commercial real estate refers to properties used for business purposes rather than for living. Typically, these properties are rented by tenants to generate rental income. CRE can range from a small store to a large factory or warehouse.

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There are various types of commercial real estate, including retail and office spaces like shops, office buildings, veterinary clinics, strip malls, restaurants, and healthcare facilities. CRE as a business involves building, marketing, managing, and leasing these properties.

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Two Main Types of Commercial Real Estate

Commercial and residential real estate are the two main types of properties in the real estate market.

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Residential properties are homes where people live while commercial properties are used for business activities. Interestingly, multiunit rental properties where tenants live are considered commercial for the landlords who manage them.

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The Different Types of Commercial Real Estate

Commercial real estate includes various properties, from industrial spaces to hotels and vacant land. Generally, it falls into one of six main categories.

1. Office

Office buildings are usually classified into two types: Urban and suburban. Urban offices in cities can include skyscrapers and high-rise buildings, sometimes covering millions of square feet. Suburban offices are often smaller and are usually found in office space parks.

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Office buildings can have multiple tenants or just one, and many are built specifically for their occupants. They are ranked into three classes:

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• Class A: Prestigious buildings with high-quality finishes, modern systems, and great locations that attract top-tier tenants.
• Class B: Average buildings that cater to a broad range of tenants, with decent finishes but less competitive than Class A.
• Class C: Class C office buildings are older buildings aimed at tenants seeking functional space at lower rents, including some medical office buildings.

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2. Retail

Retail properties are where we find stores and restaurants. They can be multitenant, often with a significant anchor tenant to attract customers or stand-alone buildings.

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The retail sector is diverse and influenced by the size, concept, and number of tenants. Examples include single-tenant buildings, large stores like Target, or stand-alone banks and restaurants.

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3. Industrial

Industrial commercial buildings support various operations, usually outside city areas, often near major transportation routes. They can be categorized into four types:

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• Heavy manufacturing: Customized buildings for machinery and production
• Light assembly: Less specialized spaces for assembly or storage
• Bulk warehouse: Large distribution centers
• Flex industrial: Spaces that combine industrial and office uses

Industrial properties also have specific zoning laws, especially for research and development facilities.

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4. Multifamily

Multifamily properties consist of five or more residential units owned by a single entity. This category includes apartment buildings, condos, and townhomes, and similar office buildings, they are classified as Class A, B, or C.

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Apartment types include:

• High-rise: Buildings with nine or more floors
• Midrise: Multistory buildings with elevators, typically in cities
• Garden-style: Low-rise developments in landscaped settings
• Walk-up: Four- to six-story buildings without elevators
• Manufactured housing communities: Lots leased to owners of manufactured homes
• Special-purpose housing: Properties for specific groups, such as students or seniors

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5. Hotels

The hotel sector includes establishments that provide accommodations and services for travelers. Hotels can be independent (boutique) or part of a major chain and are divided into six categories:

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• Limited service: No room service or on-site restaurant
• Full service: Offers room service and dining options
• Boutique: Smaller, unique hotels in prime locations, not part of a chain
• Casino: Includes gaming facilities
• Extended stay: Equipped kitchens and larger rooms for longer visits
• Resort: Full-service hotels located in tourist areas, often with additional amenities like golf courses and spas

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6. Special Purpose

Unique-purpose properties need to fit neatly into the other categories. They can include open land for fairs, amusement parks, churches, self-storage facilities, and bowling alleys.

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Residential vs. Commercial Property  vs. Owner-Occupied Properties

The Basics of Commercial Leases

In most cases, businesses rent commercial properties rather than owning them. An investor or group of investors owns the building and collects rent from the tenants. Key features of commercial leases include:

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• Types of leases: There are various commercial leases, including single-net, double-net, triple-net, and gross leases, each assigning different responsibilities for property expenses between landlords and tenants.
• Lease rates: Typically quoted as an annual cost per square foot, which differs from residential leases expressed as total yearly or monthly commercial unit rent.
• Lease duration: Commercial leases usually last from one to 10 years, with office and retail spaces averaging five to 10 years. This is unlike residential leases, which are often yearly or month-to-month.

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Owner-Occupied Properties

An owner-occupied physical property is one that a business owner owns and uses for their operations. This arrangement offers different advantages:

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• No-rent payments: The owner does not pay rent, which can be a significant cost-saving compared to leasing.
• Control over property: Owners have complete control over how to use and modify the property to suit their business needs.
• Long-term investment: Owning a property can be a long-term investment that may appreciate over time, potentially providing financial benefits.

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Key Differences

• Ownership: In a commercial lease, the tenant does not own the property while in an owner-occupied property, the business owner owns the building.
• Cost structure: Leasing involves regular rent payments while owning and eliminating rent, but it incurs property-related costs like maintenance and taxes.
• Control: Owners have complete control over the property while tenants must follow lease agreements and may face modification restrictions.

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Don't Be Confused

"Commercial residential property" typically refers to a type of real estate that combines commercial and residential uses. This can include:

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• Mixed-use developments: Buildings or complexes with residential units (like apartments or condos) and commercial spaces (like retail shops or offices) within the same structure.
• Multifamily properties: These are often considered commercial properties because they have five or more residential units, but they can also house small retail spaces or services on the ground floor.

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Turn Knowledge Into Action

Knowledge can give you an edge over others, but it only matters if you put that commercial real estate knowledge into your property management. What you learn from this article will be just information unless you apply it in real life.

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You'll gain even more advantages when you have a partner who complements your skills. Ben Reinberg believes true success comes from helping those around you succeed. His commitment to mentoring aspiring investors and entrepreneurs demonstrates the power of sharing knowledge.

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Our efforts create an environment where new talents thrive, innovate, and make meaningful contributions to the industry, starting today.

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Frequently Asked Questions (FAQs)

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 How to get into commercial real estate

Getting into commercial real estate begins with education, research, and understanding the different types of commercial real estate, from multifamily and industrial to retail real estate and office properties. New investors should study commercial real estate investment strategies and assess commercial real estate risks before buying their first property. Building connections, using a structured real estate investment checklist, and learning from experienced professionals help lay the foundation for long-term success.

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What is a cap rate in commercial real estate?

A capitalization rate, or cap rate, is a key metric in commercial real estate investing that compares a property’s net operating income to its purchase price. It helps determine what is a good ROI for commercial real estate and measures the property’s potential profitability. Investors often analyze cap rates alongside other valuation tools, such as the gross rent multiplier and depreciation of commercial building data, to evaluate risk and return.

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What is the difference between residential and commercial property?

Residential real estate is used for living, while commercial property generates income through leases or business operations. Commercial real estate definition covers property types such as offices, warehouses, and retail property developments, each with unique tenant structures and revenue models. Unlike residential investments, commercial properties require a more in-depth analysis of factors such as commercial real estate depreciation years, tenant quality, and market trends, which significantly impact value and performance.

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Can commercial property be used for residential?

Yes, commercial property can sometimes be repurposed for residential use, but it depends on zoning laws and city regulations. Adaptive reuse projects, such as converting old office buildings into apartments, require approvals and may involve complex considerations like depreciation life of commercial buildings and construction compliance. These mixed-use transformations can create strong investment opportunities within the retail real estate market, blending living and business spaces in high-demand urban areas.