The Many Facets of Commercial Real Estate

Real Estate

There are basically three components of real estate – commercial, industrial and residential. This write-up will deal solely with commercial real estate.

Commercial real estate is used for commerce and business purposes only. It covers a wide spectrum of activities, ranging from a single gas station to huge shopping malls, from office spaces to convenience stores and hotels and restaurants. In fact it covers all trade and commercial aspects apart from the manufacturing sector which falls under industrial real estate. Commercial property may be owned by the business functioning from that premises but more often than not, an investor buys a building and rents it out to different businesses located in it. While rent for residential premises is paid monthly or annually at a pre-determined rate, that of commercial real estate is in the form of annual rental dollars per square foot.

Real estate has traditionally paid rich dividends to investors and has generally been considered to be a hedge against inflation and falling value of currencies. The commercial real estate sector is no exception to this rule. Investors can either get lucrative returns on investments by selling value appreciated properties or get monthly returns in the form of rents. Selling of property can be unit wise such as a building or factory or hotel or by breaking down the project and selling space to different offices in the same building. The latter method gives a higher and quicker return.

Commercial real estate is broadly categorised in three. The first is the Class A buildings that are comparatively new, have good infrastructure facilities and are situated in prime locations. Class B ones are not as good aesthetically and are older in age. Investors often buy these buildings and after taking up extensive restoration work sell these at a premium. Class C buildings are a least attractive proposition for investors, being over 20 years of age and requiring a lot of maintenance work.

Lease periods on commercial real estate can range from a year to 10 years and more though the typical minimum for office spaces starts at 5 years. Large established business houses prefer a long lease period but for investors a short term lease offers more flexibility to adjust lease rents.

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