Understanding the Different Types of Commercial Real Estate Is Essential for Business Bankers!

I have enough business banking years of experience under my belt to confidently tell you that you can find Commercial Real Estate (CRE) loan opportunities in any kind of environment. I’ve written several articles about this! As the economic environment changes, you also need to change your prospecting approach. If you really want to sound like a Rockstar Business Banker when talking CRE with your prospects or clients, arm yourself with valuable knowledge that you can serve up when the opportunity presents itself. You want to set yourself apart in the marketplace and consistently get your foot in the door by serving valuable insight to your clients and prospects! 

Understanding Different Types of Commercial Real Estate: Commercial real estate presents great opportunities for investors and business owners, but it’s important to be well-versed in how to invest wisely in this sector. Many aspiring real estate investors hesitate out of fear of making costly mistakes or the belief that they can’t secure financing to acquire the real estate. However, gaining knowledge about commercial real estate can help mitigate those concerns and prevent financial losses. All investments carry risks, and understanding how to evaluate those risks is key to avoiding substantial losses. Commercial real estate is a broad sector encompassing many property types. It's not limited to just towering skyscrapers in city centers. Other types of commercial properties include:

• Office Buildings: These properties are used by businesses and professionals. They can range from small office spaces to large skyscrapers.
• Industrial Buildings: Designed for companies in the manufacturing sector, these buildings accommodate production activities or serve as warehouses.
• Retail and Commercial Spaces: This category includes a variety of businesses like retail stores, shopping centers, restaurants, medical offices, coworking spaces, and distribution centers.
• Special Purpose Commercial Real Estate Properties: Designed for a specific use that doesn't easily adapt to other purposes. These properties are built to meet the unique operational needs of a particular business or industry. Because of their tailored design, repurposing or converting them for other uses can be challenging. Common examples of special purpose properties include: gas stations, car washes, hotels, theatres, entertainment venues, hospitals, assisted living facilities, sports complexes, schools and religious buildings.
• Land: This is undeveloped, vacant land that typically lacks infrastructure such as buildings and utilities. Investors and owner-users purchase land to build new structures.

Choosing the Right Location: It’s crucial to select the right location. The competitive nature of today’s real estate market makes location selection paramount. Property values in commercial real estate are influenced by the city, neighborhood, and nearby amenities, such as parks, shopping areas, or popular public spaces. A prime location can provide security for owner-users, investors and tenants, as properties in highly desirable areas are easier to rent and often yield significant appreciation in value when sold.

Purchasing an Occupied or Vacant Property: Investors must decide whether to buy a property that’s already occupied or one that’s vacant. Each option comes with its own pros and cons, and it’s important to weigh these against the goals of your investment. Occupied properties often come at a lower price and include data on profitability. As soon as the deal closes, you can start collecting rent. Meeting current tenants can also offer valuable insights into the property’s condition. However, buying an occupied property can also present challenges, such as dealing with existing tenants’ issues or addressing potential damage. Records may reveal unpaid bills or problematic lease agreements, which means you’ll need thorough management reports and financial statements. On the other hand, buying a vacant property offers flexibility in choosing tenants and negotiating lease terms. This gives investors greater control over the building’s operations. However, determining the profitability of a vacant building can be difficult, and the task of finding reliable tenants falls on the investor.

Establishing a Commercial Lease: A solid understanding of local laws and standards is critical when establishing commercial leases. These leases are typically long-term agreements, which provides security for the property owner. However, tenants may have the right to terminate the lease early. It’s essential that tenants fulfill their obligations under the lease, and in the event of non-payment, legal recourse is available to recover the property.

Obtaining Financing: Commercial real estate financing (purchase or refinance) falls into two buckets: investor and owner-user. A property is considered owner-user when the owner occupies 51% or more of the available space. Investor is anything less than 51% owner-occupied. Owner-users can secure up to 90% financing to acquire or refinance commercial properties. Investor financing is usually based on the amount of debt the net operating income of the property will support. This usually translates to 50% to 60% financing. Construction financing is available for both investor and owner-user commercial real estate.

Managing Setbacks and Delays: While commercial real estate can be highly lucrative, it’s important to be prepared for potential drawbacks. Costs and timelines can be unpredictable, whether related to renovations, construction, or management transitions. Flexibility is key in navigating this space, and investors should set clear expectations and timelines for the project’s completion.

Conclusion: Commercial real estate can be a profitable investment, but it’s not without risk. Location, leases, and project timelines all play crucial roles in determining success. A well-researched strategy, paired with adequate financing, is essential. With proper preparation and planning, investors and business owners can confidently enter the commercial real estate market and reap the benefits.

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