Commercial Real Estate 101

Commercial real estate, aka CRE, is an industry that will be growing forever. CRE is an alternative to other investment strategies such as stocks, cryptocurrency, or art. Investing in commercial real estate has made some people billionaires. Some well-known people who are involved in commercial real estate include Donald Bren, Donald Trump, Jared Kushner, and Arnold Schwarzenegger. At Talon’s Group, we offer assistance and guidance in finding your perfect commercial real estate property in or near Auburn.

What is commercial real estate?

Commercial real estate is real estate purchased with the intention of commercial use. Compared to residential real estate, commercial is anything with more than 5 units while single units are considered residential. This includes many different types of spaces for purchase and use. Money from commercial real estate is earned through income or appreciation from your tenants’ rent.

Types of investments

There are many different types of commercial real estate–not all mentioned here– but here are a few of the most popular types of investments in CRE that go over the typical leasing period.

  • Offices

First on the list is office buildings. These can be skyscrapers, office parks, or mid-rises in suburbs. Some examples of clients you might have are lawyers, doctors, corporate offices, or start-up companies. These leases typically last a long period of time, 5-10 years on average.

  • Multifamily

Multifamily is a cross between residential and commercial. These are large complexes or multiple units in one place. This can be a duplex or a couple hundred residents’ apartment complex. Some options might be a garden apartment, mid-rise, or a high-rise. A garden apartment is a few short buildings spread out throughout a property. A mid-rise is most popular in Auburn, consisting of buildings with 30-100 units in urban or suburban areas, typically 5-12 stories. Lastly are high rises. These are what you think of when you imagine where someone in New York City lives. Leases for multifamily real estate can be short or long-term; it all depends on the owner’s terms.

  • Industrial

Industrial real estate is used for a business’ industrial operations. This can include warehouses, heavy manufacturing, or assembly buildings. They are not located where prime real estate is, due to zoning regulations for industrial business operations. These leases are usually 5 or more years.

  • Retail

Retail can include a strip mall or shopping center and can include clothing stores, grocery stores, and restaurants within a shopping center. A power center is a shopping center that has many major retailers such as a shopping area with a Walmart and Sam’s Club along with other smaller chains. You can also invest in a mall from a purchase or build a new one. These have mixed lease agreements, all up to the owner of the property.

These are just a few examples of CRE investments you can make! There are more, including mixed shopping centers or hotels, but this is a guide of the most common types. It is best to pick based on what you are interested in. This makes it a more enjoyable investment that you are proud of.

Why invest in commercial real estate?

1. High-income potential

CRE has a relatively steady cash flow with solid and predictable returns. Investors in commercial real estate typically make more than residential real estate or stock investors. Because there is a higher price tag for rent, investors make thousands more a month.

2. Tax Benefits

There are a few tax benefits for investing in CRE with depreciation being one of them. Depreciation allows you to deduct a portion of your property’s value from the taxable income. The building will depreciate over time but desirable locations are changing constantly based on the surroundings. There is also the 1031 tax exchange which allows your profits to be postponed when you sell. This allows you to defer more capital gains, making more income.

3. Hedges Against Recessions

A recession is defined as a period of an overall economy’s decline for several months–not just one industry but the entire nation is affected. People will always need housing or places to run their businesses, even during a recession. The property owners have the power of pricing during times like this. Lowering the price of rent during a recession will bring in more businesses; whereas, raising or not adjusting to the economy will make you lose tenants. Commercial real estate investors have not suffered the way other investors have in former recessions.

4. Portfolio diversification

CRE is a great way to diversify your investments and portfolio that isn’t just investing in the stock market or a hedge fund. As we learned in the past few years, you never know what could happen in the world that will affect the economy. Having several different types of investments can make you more steady when the market fluctuates. This is because not every market will suffer at the same time during a normal economy. You are also exposed to more long-term opportunities and connections for other areas of investing or business that you might be interested in. CRE helps you minimize risk as you achieve long-term financial goals.

5. Less turnover than other real estate investments

Commercial real estate has a lot less turnover than residential. As mentioned earlier, the lease agreements vary per type of building and the owner’s terms, but that is up to the owners. Commercial clients are typically long-term unlike residential where the lease might last one year. The lease agreements of commercial real estate ensure stable cash flow without the hassle of changing tenants for the owner. These leases also make it easier for the business to not have to relocate if they are successful in one location.

How do I get involved?

If you are looking to get involved in commercial real estate, consider working with The Talons Group. We want to assist and improve our community that we live and work in. There are many benefits of commercial real estate. We are ready to help you choose what type might be your best fit throughout not only Alabama but all of the Southeast. Contact us today to learn more and build a relationship with our team!