Commercial real estate refers to properties used specifically for business or income -generating purposes with the intention of generating a profit. Some people also refer to commercial real estate as ICI or industrial, commercial, and institutional.
The six most common types of commercial properties include:
- Office buildings – single occupancy buildings or professional multi-tenant office buildings
- Industrial real estate – light industrial storage, warehousing, research, manufacturing, assembly, production, and distribution. Industrial can also include heavy uses such as chemical plants, cement plant, power plants, and other large purpose build facilities.
- Retail/restaurant- neighbourhood center, regional shopping center, power centers
- Multi-family – an apartment, or high rise generates rental income
- Land – including undeveloped investment properties
- Miscellaneous – hotels, hospitals, storage facilities and other specialized uses
What are the different types of commercial leases?
- Percentage lease -primarily used in retail calculates the rent by adding a percentage of monthly sales to a base rental rate number
- Gross Lease – the landlord pays all costs besides rent such as taxes, insurance, maintenance, although they may build these into the lease, called a load factor
- Net lease – the business pays for some or all those costs directly
- Double net lease – business pays for all taxes and insurance
- Triple net lease – tenant pays for everything
What drives commercial real estate prices?
Key factors driving commercial real estate demand and pricing are.
Demographics are a significant factor. Are they increasing or decreasing subject to birth rates, migration patterns, age and sex cohorts, income, ethnicity, and regional preferences?
Interest rates have a major impact on commercial real estate. Lower rates generate more buyers due to lower financing costs and expand demand which drives up prices.
Economic conditions including growth or decline in gross domestic product, capital availability, impacts of technology, levels of manufacturing and service sector activity, and unemployment rates drive real estate demand. The economy tends to follow cycles and so does the real estate industry. Are we in a period of expansion or contraction?
Government policies at all levels can impact the demand and prices of real estate. Demand and supply can be impacted by tax incentives, rates, and deductions. Infrastructure servicing programs, loan programs, building codes and standards, development charges, official plan and zoning by-laws, development approval policies can encourage or discourage real estate development.
What are some of the major questions to ask in purchasing commercial property?
What has the property been used for in the past? Do you plan on continuing this use? What is the environmental condition? If your use is different will the official plan and zoning support your use? Is there support for a zoning change?
Does the lay out of the land and building fit with your business operation or will significant renovations and lot development be required? Is the level of utilities required for your business, power, water and sewage, gas, and telecommunication available at this site? Over what period can the property accommodate your projected growth rate?
If it is an investment property, will it earn income and pay rents that can support your investment target and ability to cashflow the property?