Understanding Commercial Real Estate: 8 Types of CRE

Commercial real estate (or CRE) is a property that is used exclusively for business or workplace purposes or to generate cash flow in some way for the owner or lessee. Commercial real estate spaces include office space, industrial properties, multi-family residential rental buildings containing more than five units, and retail spaces.

Commercial real estate is also governed by zoning, where certain types of commercial properties, such as industrial buildings, have to exist within their designated zones. Most commercial real estate properties are owned by investors who lease the property out to relevant businesses for longer than residential real estate leases, lasting from about five to ten years.

Commercial real estate is classified by age and quality, as either Class A (newer buildings with high-quality infrastructure and location), Class B (slightly older and less appealing buildings), and Class C (buildings at least 20 years old and in need of maintenance). These classes are used to inform real estate investors about the state and value of their investment properties.

Here is an overview of the differences between residential and commercial real estate:

• Purpose: Commercial real estate spaces are built specifically to generate income for the lessee or the investor. Though owners of a single-family residence can lease their home to generate income, the primary purpose of residential property—like a condo, single-family home, or townhouse—is for a person or family to live in.
• Occupancy: Large apartment buildings and high-rise residential buildings with more than five units are considered commercial buildings classified as multi-family properties. Any residential buildings with one to four rental units as a part of the property, including single-family homes, are considered residential real estate.
• Lease length: Commercial real estate leases are generally for five to ten years or more, meaning they generally are longer than residential leases, most of which are annual leases.
• Rates: Commercial real estate prices are typically reported as a valuation calculated by the valuation of the square footage of a property. Residential real estate properties are typically priced as the annual sum of monthly rent.

Commercial real estate is classified using eight distinct categories.

1. 1. Office space: Office spaces include all office buildings with workspaces that are available for rent for different businesses to operate out of.
2. 2. Industrial space: Industrial real estate is any real estate used for the purpose of industry, including heavy manufacturing, light assembly, bulk warehouses, and flex spaces that can mix industrial space with office space.
3. 3. Multifamily complexes: Multifamily properties are residential rental properties with more than five units like apartment complexes that are considered commercial space because they generate rental income for the property owner or property management company.
4. 4. Retail spaces: Retail properties are any buildings used for retail purposes. This can be anything from single storefronts to strip malls and shopping centers. Larger properties such as malls will typically have an anchor tenant, which is a larger department store that will draw other retailers to the property.
5. 5. Hotels: Hotels are divided into three different categories. Full-service hotels are large, multi-room hotels with at least one bar or restaurant. Limited-service hotels are smaller, more bare-bones hotels that may not offer services like concierge, 24-hour desk services, or turn-downs. Extended stay hotels offer larger rooms which are more similar to serviced apartments.
6. 6. Mixed-use properties: Mixed-use properties are typically any combination of the above categories. Common examples of mixed-use properties are multi-family apartment buildings with retail spaces on the ground floor.
7. 7. Land: Land includes farmland, agricultural real estate, vacant land, or brownfield land that was previously used for industrial or commercial purposes and is available for reuse.
8. 8. Special-purpose: Special-purpose real estate includes commercial properties such as amusement parks, theaters, zoos, parking lots. Any type of commercial property that does not fit into the above categories would be considered special-purpose.

CRE owners offer four types of commercial leases, each with lease terms that have different tax and insurance liabilities for the lessor.

1. 1. Single-net lease: Single-net leases make the tenant responsible for paying all property taxes for the duration of their lease.
2. 2. Double-net lease: Double-net leases make the tenant responsible for paying insurance and property taxes for the duration of their lease.
3. 3. Triple-net lease: Triple-net leases make the tenant responsible for paying insurance, maintenance, and property taxes for the duration of their lease.
4. 4. Gross lease: In a gross lease, the tenant only pays the rent, and the landlord pays all other related fees for the property.

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