If you walk up to someone and ask them to explain the concept of real estate, there’s a good chance that they’ll mention the word “house” at some point. It’s not hard to figure out why: For the majority of people, the only exposure they have to real estate is the process of buying or selling a home. While residential real estate does represent a significant portion of the overall industry, there’s much more to real estate than just home sales–there’s also the entire field of commercial real estate.
Just as the name suggests, commercial real estate refers to properties that are intended to generate profit for the owners; this is different from residential real estate, which focuses on homes and properties where people can live rather than work. Because commercial real estate is profit-oriented, most commercial properties are rented to tenants rather than sold to buyers so that the property owner can charge rents. In fact, rents are the primary way that commercial real estate properties generate income. These rents are often calculated as a function of the square footage of the property.
Leases for a commercial property can last as short as one year or as long–or even longer–than 10 years. Generally, larger tenants have longer leases for security and stability reasons, but on the other hand, a short-term lease could provide tenants with more flexibility to adjust rents.
There are six categories of commercial properties: offices, from small buildings to skyscrapers; industrial, which could include research and development facilities, warehouses, factories, and other structures; retail and restaurant, which are largely self-explanatory; multi-family, such as apartment buildings or complexes; land, either to be developed or redeveloped; and a final category for miscellaneous income-generating properties, like hotels, hospitals, and so on. At times, certain properties–like apartment buildings, for example–could fall into more than one category.
Another factor that distinguishes commercial real estate from residential is the potential for investment. While a home itself is one of the most significant investments that a person will make during the course of his or her life, that home probably won’t be an income-generating investment unless they decide to sell it. Commercial real estate, on the other hand, provides investors an opportunity to earn a profit off of properties they have a stake in. So while most people may see real estate as nothing more than home sales, in reality, there’s a lot more to real estate than that!