Commercial Real Estate
The term commercial property (also called commercial real estate, investment or income property) refers to buildings or land intended to generate a profit, either from capital gain or rental income.[1]
Commercial property includes office buildings, industrial property, medical centers, hotels, malls, retail stores, farm land, multifamily housing buildings, warehouses, and garages. In many states, residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes.
Commercial real estate is commonly divided into six categories:
1. Office Buildings – This category includes single‐tenant properties, small professional office buildings, downtown skyscrapers, and everything in between.
2. Industrial – This category ranges from smaller properties, often called “Flex” or “R&D” properties, to larger office service or office warehouse properties to the very large “big box” industrial properties. An important, defining characteristic of industrial space is Clear Height. Clear height is the actual height, to the bottom of the steel girders in the interior of the building. This might be 14‐16 feet for smaller properties, and 40+ feet for larger properties. We also consider the type and number of docks that the property has. These can be Grade Level, where the parking lot and the warehouse floor are on the same level, to semi‐dock height at 24 inches, which is the height of a pickup truck or delivery truck, or a full‐dock at 48 inches which is semi‐truck height. Some buildings may even have a Rail Spur for train cars to load and unload.
3. Retail/Restaurant – This category includes pad sites on highway frontages, single tenant retail buildings, small neighborhood shopping centers, larger centers with grocery store anchor tenants, “power centers” with large anchor stores such as Best Buy, PetSmart, OfficeMax, and so on even regional and outlet malls.
4. Multifamily – This category includes apartment complexes or high‐rise apartment buildings. Generally, a fourplex or more is considered commercial real estate.
5. Land – This category includes investment properties on undeveloped, raw, rural land in the path of future development. Or, infill land with an urban area, pad sites, and more.
6. Miscellaneous – This catch all category would include any other nonresidential properties such as hotel, hospitality, medical, and self‐storage developments, as well as many more. [4]
| Category | Examples |
|---|---|
| Leisure | hotels, public houses, restaurants, cafes, sports facilities |
| Retail | retail stores, shopping malls, shops |
| Office | office buildings, serviced offices |
| Industrial | industrial property, office/warehouses, garages, distribution centers |
| Healthcare | medical centres, hospitals, nursing homes |
| Multifamily (apartments) | multifamily housing buildings |
Of these, only the first five are classified as being commercial buildings. Residential income property may also signify multifamily apartments.
Additional commercial property information[edit]
–Elements of an Investment in Commercial Property
The basic elements of an investment are cash inflows, outflows, timing of cash flows, and risk. Your ability to analyze these elements is key in providing services to investors in commercial real estate.
Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment. An example of this sort of investment is a Real estate fund.
Cash inflows include the following:
- Rent
- Operating expense recoveries
- Fees: Parking, vending, services, etc.
- Proceeds from sale
- Tax Benefits
- Depreciation
- Tax credits (e.g., historical)
Cash outflows include:
- Initial investment (down payment)
- All operating expenses and taxes
- Debt service (mortgage payment)
- Capital expenses and tenant leasing costs
- Costs upon Sale
The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year‐over‐year. You need to be able to predict the probability that the cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of them will be as predicted, and what the probability is that there may be unexpected cash flows, and in what amounts they might occur.[2]
The total value of commercial property in the United States was approximately $11 trillion in 2009, as measured by the CoStar Group and published in the Journal of Real Estate Management.[3]
According to Real Capital Analytics, a New York real estate research firm, more than $160 billion of commercial properties in the United States are now in default, foreclosure, or bankruptcy. In Europe, approximately half of the €960 billion of debt backed by European commercial real estate is expected to require refinancing in the next three years, according to PropertyMall, a UK‑based commercial property news provider PropertyMall. Additionally, the economic conditions surrounding future interest rate hikes; which could put renewed pressure on valuations, complicate loan refinancing, and impede debt servicing could cause major dislocation in commercial real estate markets.
However, the contribution plowed into Europe’s economy in 2012 can be estimated at around €285 billion according to EPRA and INREV, not to mention social benefits of an efficient real estate sector.[4] It is estimated that commercial property is responsible for securing around 4 million jobs across Europe.
Capitola
Capitola is a city in Santa Cruz County, California, United States, on the coast of Monterey Bay. The population was 9,918 at the 2010 census.
The original settlement now known as Capitola grew out of what was then called Soquel Landing. Soquel Landing got its name from a wharf located at the mouth of Soquel Creek. This wharf, which dates back to the 1850s, served as an outlet for the produce and lumber grown in the interior. In 1865, Captain John Pope Davenport, a whaleman at Monterey, moved his operations to be near the wharf. Unable to capture any whales, he moved his operations the following year to Point Año Nuevo.[4][5]
In 1869, Frederick A. Hihn, who owned the property in the vicinity of the wharf, decided to develop it as a seaside resort. At first he leased the area to Samuel A. Hall and the area became known as Camp Capitola. Most authorities believe that it was Hihn who chose the name of Capitola, but they are unsure as to why he did so. Several possibilities have been asserted, one being that it was named for the heroine of The Hidden Hand, a novel by the popular author E.D.E.N. Southworth, favored by Hall’s daughter Lulu. Capitola is known as the oldest beach resort on the West Coast.[6]
Capitola is a popular tourist town because of its trendy shops and restaurants on the shore directly connecting to a fishing wharf and its large, sandy beach.
Capitola lies west of the census-designated area of Aptos and east of the census-designated place of Live Oak.