Commercial real estate investing as an alternative investment strategy is nothing new, but it’s still a mystery to many investors.
- Commercial real estate (CRE) is all around us, in ways that many people may not notice. The category of “commercial property” includes apartments, offices, retail space, and other such buildings.
- Commercial real estate investments can earn money through income or appreciation. Income is produced through the operation of the building, often through tenants making rental payments, while appreciation is earned through an increase in the property’s value over time.
- Commercial real estate investing normally requires more capital, expertise, and time than many investors have. But there are investment options, including Fundrise, that make it possible for anyone to own a diversified portfolio of commercial real estate investments.
Different types of commercial real estate
Commercial real estate property types themselves can vary widely, but can be divided by their function into four main categories: office, multifamily, retail, and industrial properties.
- Office: As the name suggests, office property consists of real estate used for office buildings. This includes skyscrapers and high-rises in urban areas, along with office parks and mid-rises in suburban areas. Example tenants could include a law firm or start-up company. Office space can come in a range of styles and sizes. Lease terms for commercial real estate are often longer, in the five-year to ten-year range.
- Multifamily: Multifamily properties offer residential housing in exchange for rental payments. Buildings with more than four units are generally considered multifamily property. Apartment buildings or apartment communities, co-operatives, townhomes, and condominiums are considered multi-family real estate. The size and number of units of these properties can vary widely. Multifamily lease agreements are usually more flexible in terms of duration. Residential leases can be short-term or long-term but are typically not longer than a year. Some lease agreements can even be month to month.
- Industrial: Industrial real estate is used for industrial business operations. This can include heavy manufacturing, warehouses, assembly, and research and development buildings. Oil refineries (heavy manufacturing), Amazon distribution centers (warehouses), product assembly factories, and pharmaceutical research and development facilities fall into this category. These properties aren’t generally located in areas that would be very desirable for a residential or retail property, and their placement is guided by zoning regulations that apply to their industrial business operations. Lease agreement lengths for industrial real estate are typically for five years or more.
- Retail: Retail commercial real estate includes properties that provide the spaces required for retail businesses to conduct business with the public in general. Clothing shops and restaurants are considered retail real estate. This kind of commercial real estate can be developed in large multi-tenant complexes in the form of shopping malls, strip malls, factory outlets, or other such shopping centers. It can also take the form of a single-tenanted standalone building. The earning potential of retail real estate for its owner can depend largely on its specific geographic location, because it significantly impacts which retail tenants will want to set up shop there. Retail leases also tend to be mid- to long-term, often in the 4-5 year range.
How commercial real estate investments can generate returns
An investment strategy often begins with purchasing a property, with the aim of making money in two possible ways: first, by leasing the property and charging tenants rent in exchange for use of the property; and, second, by capturing appreciation of the property over time.
The bottom line
- Unlike publicly-traded stocks, direct commercial real estate investing can provide stable cash flow in the form of rental income, often without the volatility of public investments. Adding real estate to an investment portfolio can offer the benefits of a new cash flow, plus long-term appreciation potential, as well as portfolio diversification.
- Commercial real estate is a hard asset that is also a scarce resource. It holds intrinsic value, and usually appreciates in value over time. Because of its cost, access to this asset class has historically been limited to large institutional investors, but new investment platforms like Fundrise have made it easier than ever before for anyone to access commercial real estate investing.
Historically, direct commercial real estate investing has been out of reach for the everyday investor and their portfolios. This is because investments in commercial real estate are typically dominated by institutional investors as projects require millions of dollars in capital and a deep reservoir of expertise for improving and operating a property. Fundrise makes it possible for you to invest directly in a diversified portfolio of private market commercial real estate for low fees, low minimums, and the potential for strong returns.
If you’re interested in learning more about commercial investments or if you need assistance in making the right investment decision, contact us today: