What is a commercial space?
Commercial property is property intended to generate a profit. The profits can come from either rental income or capital gains. Capital gains are profits derived from the sale of an asset that has increased in value while being held. It can include tangible property. Things like clothing, food, a car, and more are tangible property. Intangible property, such as shares or cryptocurrency like Bitcoin, can also be sold at a commercial property. Commercial property also goes by the following names: investment property, commercial real estate, and income property. Commercial property includes an incredibly wide range of buildings. It includes office buildings, retail stores, multifamily housing units, farms, hotels, malls, medical centers, garages, and warehouses. Some housing that has many people in a small area also is qualified as commercial property.
Commercial buildings are buildings used for the purpose of making income. These include the office buildings, malls, and retail stores. Commercial properties may contain more than one kind of building. Also, some larger buildings may have separate uses. For example, a single commercial building may contain restaurants, retail, and offices on different levels. These multi-function buildings are will be classified as multi-use commercial buildings.
Designations and regulations are important, because strict laws control commercial zones. A business must be located at least partly in a commercial zone. The designation of property as commercial affects how it is taxed and financed, and what laws are applied to it.
Key differences and similarities between residential and commercial properties
Residential properties, as you may have guessed, are properties where people live. They include single-family homes, townhouses, and apartments. The owner of the property may live there, or may rent out the building/property. Individuals and families typically lease these properties.
As we mentioned, these are typically non-residential properties that have been built with the goal of making income. Like residential properties, the owner may operate a business from the commercial property that s/he owns. They may also rent it out for income.
Companies will frequently rent the place they do business. This is because their business is not primarily real estate. Renting frees up time and money to focus on and invest in their primary business. Because of this, commercial properties are seen as strong investments.
Types of commercial properties
There is no agreed-upon breakdown of commercial properties. However, these categories should include the vast majority of them.
- Offices: office buildings, serviced offices.
- Industrial: warehouses, factories.
- Leisure: pubs, hotels, restaurants, sport facilities.
- Healthcare: hospitals, nursing homes, clinics.
- Retail: shopping centers, shops.
- Multifamily: multifamily housing units (apartments).
- Land: farmland, land predicted to increase quickly in value.
Investing in commercial versus residential properties
- Residential properties are seen mostly as non-productive assets. The way they can make money is by increasing in value over time.
- Commercial properties are seen as investments that can make significant amounts of money. These properties make money by creating goods and services that are sold. They also can expand over time, adding assets and value.
Investing is more difficult for commercial properties.
For residential properties, banks can lend up to 90% on an asset. Commercial properties have a ratio of only 60-40%. This means that the barrier to entry is much higher. A borrower must put up much more equity to invest in a commercial property. A borrower probably also has to begin with much more money to invest in the first place. Other barriers to entry include more research being required when investing. These include topics like tenant agreements, operatingefficiency, building services condition, outstanding warranties and consents, and much more.
Property management is more difficult for commercial properties.
Residential properties typically have one tenant/family in a unit. Managing the property is easier. The amount of people who will be using it, who will be using it are fare more predictable. Additionally, the ways the building will be used will be much narrower. A single family unit will rarely or never have dozens of people are entering and using the property. This makes maintenance and upkeep much easier. Commercial properties are far more difficult to predict. Popular businesses will not only have hundreds or thousands of customers a day, but they may also expand. When a commercial enterprise grows, different things may happen. It may acquire the property nearby it for use. It may also expand its services. This widens what the commercial real estate is used for, and makes upkeep even less predictable. For example, a popular grocery store may purchase the storefront next to it to open a restaurant. This changes the amount of people coming in, the type of business, and more.
Although it may seem like it’s harder to predict the returns for an investor on a commercial property, the opposite is usually true. Commercial properties typically have much longer leases (around 10 years), guaranteeing property owners a higher revenue on their investment. Residential properties only have a lease of around 6 months to 1 year, guaranteeing less income for property owners.
Value of the property
Commercial property is based on a few fundamentals. What is the supply/demand for business in this area? What have the returns been on previous businesses in this building? These numbers are based on hard statistics and records. The future value of current income streams plays the largest role in commercial property valuation.
Residential property, on the other hand, has an emotional value. Owners may over or undervalue their property due to sentiment. This can often lead to more market volatility. The residential market is also more susceptible to changes in the market outside of one’s control, such as interest rate changes.
Interested in commercial property?
Whether you are looking to spiff up an old building or build your own, Reliable Commercial has got you covered. We are a full-service commercial contractor, offering quotes, renovation, building, and plenty of other services. We know that when you hire a construction contractor, just like your building, it’s an investment. We can help you make your investment live up to its full potential. Contact us today to get started.