Commercial Real Estate 101: A Beginner’s Guide

What Is Commercial Real Estate (CRE)?

No commercial real estate 101 guide worth its salt would skip getting everyone on the same page by ensuring the basics are covered, including defining CRE.

At its simplest, commercial real estate is property used to house businesses or professional services. Everything from land zoned for development to the offices, stores, restaurants, hotels and apartment buildings we walk past every day falls under the commercial real estate umbrella.

Commercial Real Estate Property Classes and Types

Commercial real estate can be broken down into a number of property classes and types.

Class designations help communicate a property’s quality, level of risk and likely return on investment. The letters A, B and C are subjective and can vary from market to market, but in general, they represent a combination of factors, including a property’s price, architecture and design, age, condition, location and amenities. The designation also references the income level or earnings of its tenants, plus its profit and appreciation potential, etc.

Class A buildings are professionally managed and have the highest quality, the best potential for profit and appreciation, and the lowest risk profile. Their high purchase price reflects their market value.

Class B buildings may or may not be professionally managed, are usually a bit older and have lower rental income, profit and appreciation potential. They’re great candidates for value-added investment, as with a little work, they can easily be upgraded.

Class C buildings are usually over 20 years old, located in less-than-ideal areas and will likely require renovations to update them and increase their income, profit and appreciation potential.

Type designations help communicate the kind of business that occurs on the property. There are eight different types of commercial real estate – also referred to as sectors or categories in this commercial real estate 101 guide – each of which has its own challenges and opportunities.

They are:

Retail
Retail CRE houses businesses that sell goods and services. Retail properties include everything from mom-and-pop corner stores, shopping malls and big box outlets to restaurants, pharmacies, dry cleaners, fitness centres, salons and more. B2C retail businesses sell products or services to consumers, while B2B ones focus on selling to other businesses.

Office
Office CRE can include one-tenant properties housing businesses such as architecture or design firms or multi-tenant buildings and skyscrapers housing banks, insurance companies, medical or dental offices, law firms, ad agencies, environmental consultants, etc.

Office space can exist in any location, including rural areas, but the largest concentration of office properties have traditionally been found in the downtown core or suburbs around major metropolitan cities.

Industrial
Industrial CRE typically houses businesses involved in manufacturing, warehousing and distribution, but can also accommodate research and development and data centres, or be modified to welcome flex businesses that bundle office, manufacturing, showroom, repair and distribution under one roof.

Industrial buildings are often large in size and outfitted with loading docks, high doors and ceilings. They may feature climate controls, refrigeration, inventory management services, high-tech security and other specialized building features and services, and are usually located near major waterways, seaports, rail lines and highways to allow for easy receipt, transfer, distribution or even return of goods.

Multifamily
Multifamily CRE in Canada refers to a group of five or more adjacent residential units that share structural components such as roofs and walls, utilities such as water, gas and electrical, systems such as heating, ventilation and air conditioning (HVAC), and amenities such as parking, fitness centres and pools.

Subcategories include:

• Apartment investment
• Student Housing
• Senior Housing

Hotel And Hospitality

Hospitality CRE includes hotels, motels and other accommodations that allow leisure or business customers (or both) to stay for long or short periods of time.

• Hotel categories include:
• Luxury, Upscale
• Midscale, Upper-Midscale (aka Limited Service, Select-Service)
• Serviced Or Extended Stay
• Budget Or Economy
• Capsule

Conversion
Conversion CRE involves taking an existing property and renovating or refurbishing it to serve one or more different functions. Whether it involves converting a former church into residential condos or a shopping mall into a multi-use hub that allows residents to live, work, shop and play in the same complex, it’s a strategic process that aims to capitalize on changing market needs.

Land
Land CRE comes in two forms and can host various commercial businesses depending on how it’s zoned.

Raw land is property that hasn’t been developed before, that may not have ready access to utilities such as electricity, gas and water, and may even lack road access.

Vacant land is property that may have been developed before and that is fully- or partially serviced by utilities offering potentially viable power or water. It may also have existing vacant buildings or structures on it.

Special-purpose
Special-purpose CRE includes properties that aren’t easily converted to other uses due to their one-of-a-kind design, layout or purpose.

Special-purpose CRE includes sports stadiums, amusement parks, movie theatres, golf courses and zoos, but also carwashes, funeral homes and hospitals.

An Action Plan For Buying, Leasing Or Franchising Commercial Real Estate

Whether you’re looking to purchase land and develop it, buy or lease a commercial building or find the perfect location for your franchise, to succeed in commercial real estate, you need to do your homework and stay organized.

Investing in CRE can be a financial and legal minefield for the inexperienced, and without a well-thought-out investing strategy and plan to minimize your risk, you could end up with a property that’s more of a liability than an asset.

We’ve created an outline of a simple step-by-step action plan in this commercial real estate 101 guide to help you stay focused and on track, and added links that will allow you to do deep dives on various subjects of interest.

Step 1: Choosing A Commercial Real Estate Agent
Choosing the right agent can make working through the often-complex processes involved in purchasing or leasing commercial real estate significantly easier. Armed with a pen, paper and the right questions to ask prospective agents, finding one whose skills and expertise match your needs becomes significantly easier.

Step 2: Conducting Market And Location Analyses
In order to begin your research, it’s a good idea to get up to speed on current commercial real estate market trends in Canada. Start with overviews, then drill down into the CRE property types and sectors that you want to explore.

If you’re buying property for your own business, you’ll need to create a customer profile to help you identify who’s most likely to frequent it and what characteristics and behaviours – or demographics – they share. Once you have an idea of who you’re looking for, it’ll be easier to abandon prospective locations whose demographics don’t line up with your target market customer profile.

Your commercial real estate agent can help conduct a market analysis and score various locations according to key factors such as target market presence, vehicle and foot traffic, proximity to transit, nearness to competition, etc.

You can use Google Street View to do a cursory preview of prospective properties and locations or ask if your agent subscribes to AI tools that can assist with property valuations.

Step 3: Doing Due Diligence
Once you’ve settled on a shortlist of locations, it’s time to do your due diligence. Due diligence allows you to uncover what’s hidden below surface appearances and reduce your financial, legal and liability risks. The goal is to avoid surprises and unseen costs that could lay waste to your budget.

Important parts of the process include reviewing zoning and permitting documents, determining if any environmental issues exist and reviewing current property management KPIs and fees.

Don’t ditch your due diligence or try to do it yourself. Leave it to the experts – including your commercial real estate agent, accountant, lawyer and environmental consultants – who’ll also provide you with documentation that will help when applying for lender financing or pitching the property to co-investors.

Step 4: Securing Financing
Even if you’re willing to put some skin in the game and use a portion of your own money for various costs associated with buying or leasing a property, you’ll likely need financing options for a commercial mortgage and leasehold improvements. You’ll need to prepare a variety of documents to be considered for various loans and lines of credit, including a project budget, financial statements and a list of your assets. Banks will also want to review your business and personal credit scores.

Step 5: Understanding Contracts And Leases
With your market and location analyses complete, due diligence done and financing secured, the last step in our commercial real estate 101 plan is understanding the process of negotiating a lease or purchase agreement.

It’s a good idea to revisit lease terms you may not be familiar with before you begin negotiations, brush up on the differences between net versus gross leases and get specific commercial real estate leasing advice for independent and retail businesses if needed.

Once your commercial real estate agent, accountant and lawyer have reviewed your documents and given you the go-ahead to sign, all that’s left to do is renovate, paint and make the space your own, then get ready to open your doors for business.