The term “commercial real estate” envelops a wide variety of real estate used to generate profit for the owner. In general, you can differentiate commercial property from residential real estate by understanding that residential real estate is usually directly used by the owner for personal use (and consists of four units or less). Using commercial real estate as an asset in a portfolio gives many investors attractive returns and diversification, but many investors don’t quite understand how commercial real estate works as an investment. The following is a broad overview of different types of commercial real estate and how they work to make a profit for the owner. For any other questions concerning commercial real estate in Lacey, Washington or the surrounding areas, give us a call at Kaufman Construction and Development.
The main difference between investing in commercial real estate and more traditional investments such as stocks and bonds is their relative liquidity. Stocks and bonds have high liquidity which means they can be bought and sold quickly and easily. However, in contrast, commercial real estate is relatively illiquid. Commercial real estate is considered to be a “hard asset,” which is defined as a scarce resource that holds intrinsic value (physical property). Stocks and bonds are purchased for their selling potential rather than for their value as a consistent source of income. However, this liquidity is offset by higher volatility. Commercial real estate can be broken down into four main categories.
Office commercial real estate consists of real estate used for office buildings. These buildings can include skyscrapers and other high-rise buildings in urban areas and cities. Additionally, office parks and mid-rises in suburban areas also compose office real estate. Typically, commercial real estate lease terms for office spaces are within the five to ten year range. Rental income and operating income are the main ways to bring in cash from an office commercial real estate property.
Industrial commercial real estate properties are used for industrial business operations. These commercial properties typically include heavy manufacturing, warehouses, assembly lines, and research and development buildings. For example, an Amazon distribution center is considered to be an industrial real estate property. Typically, these industrial properties aren’t located in prime areas in cities or suburban areas. Their placement is usually dictated by zoning regulations that apply to the operation of their business. Commercial leases for industrial properties typically run for five years or longer. Real estate owners make money from rental payments or from operating income (if they own the business that occupies the property).
Retail commercial real estate properties include properties that provide retail space for businesses to conduct business with the public. Stores and restaurants are considered to be retail real estate. Retail real estate can vary from shopping centers, single buildings, factory outlets, strip malls, or shopping malls. Geographic location is critical when it comes to the retail real estate industry. The earning potential of any commercial retail property depends on its location. Retail leases range from mid- to long-term agreements, though they’re often about five years in length.
A commercial real estate investment strategy typically begins with the purchase of the property with the aim of earning a return in two ways: rental income from leasing the property and the appreciation of the property’s value over time.
Rental income from one or more tenants can provide returns on your initial investment. However, the amount of money or the ability to generate a cash flow to the property owner depends on operating expenses, including debt service. One way to help maintain a balance of vacancy and occupancy in a commercial real estate property is to hire a property management company. Property managers are useful for investors who don’t have the necessary knowledge, financially and legally, to manage the property and its tenants well. A property management company typically charges a fixed fee or percentage fee of any rental income earnings.
Another opportunity to generate cash flow and returns on your investment in commercial real estate is from the increase in the property’s value over the time you own it. Properties can also depreciate (lose value) over time, but all types of property have the potential for appreciation. In general, real estate is a scarce resource. You can’t “create” raw land from nowhere. If demand increases in the area near your property, there’s a good chance that you’ll be able to generate more rental income from tenants or get a better offer from prospective buyers.
Kaufman Construction & Development is a Commercial General Contractor located in Olympia, Washington, specializing in custom turn-key buildings suitable for a variety of office, commercial, and industrial uses. Our company also encompasses a complete property management team that leases over 1 million square feet of our warehouse, office, and retail space throughout Thurston County.
As a hands-on company, our project managers will work directly with you from start to finish to help your dream become a reality. While utilizing best value options, we work as a team to fast track your project and maintain quality practice standards. For whatever service you may need, we’re your team. Call today to find out more about commercial real estate investment opportunities in Lacey, Washington and the surrounding areas!