We have decades of collective experience at Avenue Real Estate, so we sometimes take the basics of commercial real estate (CRE) for granted. We’ve been living them for so long, they’re second nature to us. But we thought we’d go back to basics in this post. If you’re thinking about entering the world of CRE, welcome! Here are some of the basic landscape facts and common terms you should be familiar with. And please don’t hesitate to reach out if you want to ask us any more questions.

What is Commercial Real Estate?

So let’s get into the basics of commercial real estate! CRE encompasses properties used for business purposes. Unlike residential real estate, which is designed primarily for living, CRE includes a diverse range of property types such as offices, retail spaces, warehouses, and multifamily apartment buildings. The primary goal of commercial real estate is to generate profit, either through rental income, capital appreciation, or both. Here’s a closer look at what sets CRE apart and how it functions within the broader real estate market:

• Income Generation: CRE is primarily focused on generating income. This can come from renting out spaces to tenants or through the resale of properties at a higher value. This income can be stable and predictable, especially in properties with long-term leases.
• Investment Vehicle: CRE is a popular investment vehicle due to its potential for significant returns. Investors might choose CRE for its potential for capital appreciation over time, tax advantages, and its ability to hedge against inflation. Unlike stocks and bonds, CRE is a tangible asset that provides investors with physical ownership.
• Economic Indicator: The performance of CRE often reflects the health of the broader economy. For instance, increased demand for office spaces typically indicates business growth, while high occupancy rates in retail properties suggest robust consumer spending.
• Lease Structures and Stability: Commercial properties often involve longer lease terms compared to residential properties. These leases, which can range from five to ten years or more, provide a stable and predictable income stream for property owners. Various lease structures, such as triple net (NNN) leases, gross leases, and percentage leases, allow for flexibility and risk allocation between landlords and tenants.
• Zoning and Use Regulations: CRE is subject to specific zoning laws and regulations that dictate how properties can be used. These regulations are designed to manage urban development and ensure that different property types are appropriately situated within a community. Zoning laws can significantly impact the value and usability of commercial properties.
• Types of Tenants: The tenant mix in commercial properties can vary widely, ranging from large corporations in office buildings to small businesses in retail spaces. The success and reliability of these tenants directly impact the property’s income potential. For example, having a well-known anchor tenant in a retail center can attract more foot traffic and boost the value of the property.
• Market Dynamics: CRE markets can vary significantly from one location to another. Factors such as local economic conditions, population growth, infrastructure development, and government policies can influence the demand and supply dynamics of commercial properties. Understanding these local market nuances is crucial for making informed investment decisions.
• Financing and Investment Strategies: Financing CRE typically involves larger capital requirements compared to residential properties. Investors may use various financing options, including traditional mortgages, commercial loans, and private equity. Investment strategies in CRE can also vary, with some investors focusing on core, stable properties with lower risk, while others may pursue value-add or opportunistic investments with higher risk and potential returns.

Types of Commercial Properties

Knowing the basics of commercial real estate also requires knowing what kind of properties are considered CRE. These are the big categories:

• Office Spaces: These properties house businesses and can range from skyscrapers in bustling city centers to suburban office parks. Office spaces are often classified as Class A, B, or C, with Class A being the highest quality in terms of location, construction, and amenities. Class A buildings represent the most prestigious buildings competing for premier office tenants, typically commanding above-average rents .
• Retail Spaces: Retail properties include shopping centers, malls, and standalone stores. These spaces are designed for businesses that sell goods and services directly to consumers. Location is key in retail, with high foot traffic areas being particularly desirable. The International Council of Shopping Centers (ICSC) emphasizes the importance of location, accessibility, and visibility in determining a retail property’s success . 
• Industrial Properties: These include warehouses, manufacturing facilities, and distribution centers. Industrial properties are essential for businesses involved in production, storage, and logistics. Proximity to transportation hubs is often a critical factor. The National Association of Realtors (NAR) highlights the growth in e-commerce as a significant driver of demand for industrial spaces. 

• Multifamily Properties: Unlike single-family homes, multifamily properties contain multiple residential units within one building or complex. These properties can range from small apartment buildings to large complexes and are a popular investment choice due to steady rental income. According to the Urban Land Institute, multifamily housing has been one of the most resilient sectors in real estate due to consistent demand for rental housing .

• Special Purpose Properties: These are properties designed for a specific use, such as hotels, self-storage facilities, and medical centers. Their specialized nature can offer unique investment opportunities. As noted by the American Hotel & Lodging Association (AHLA),, special purpose properties like hotels can provide substantial returns but require expert management and market knowledge .

The Basics of Commercial Real Estate: Some Key Terms

If you spend even a day around a commercial real estate brokerage, there’s a good chance you’re going to hear the following terms multiple times:

• Cap Rate: The capitalization rate is a measure of an investment property’s rate of return. It’s calculated by dividing the property’s net operating income (NOI) by its current market value.
•  NOI (Net Operating Income): This is the total income generated from a property, minus operating expenses (excluding mortgage payments). In our last post, we went into cap rate and NOI in more detail.
• Lease Types: Common lease types in CRE include gross leases (landlord pays most expenses), net leases (tenant pays some or all expenses), and percentage leases (tenant pays a base rent plus a percentage of sales). The Corporate Finance Institute (CFI) provides detailed explanations of these lease structures and their implications for both landlords and tenants .
• Due Diligence: This process involves thoroughly investigating a property before purchasing it. It includes reviewing financials, inspecting the property, and assessing legal and zoning issues. 

Conclusion

We love this business. It’s an opportunity to enrich communities, support ourselves, and meet new ambitious people every day. By understanding the basics of commercial real estate,  you’re one step closer to joining the party.  And if you’re interested in the ins and outs of running a boutique commercial brokerage that has been building business and relationships for many years, please reach out.

If you are interested in a free broker opinion of value or just learning more about investing in commercial real estate in Maryland, Virginia, or Washington DC, please contact us. Avenue Real Estate is a leading full service commercial brokerage in the Baltimore and Washington DC areas and we would love to help you explore your options and make informed decisions about commercial real estate investments.