13 Jan What is Commercial Real Estate? Common Questions & Answers

Commercial real estate (CRE) is a vital part of the business landscape, providing the spaces where people work, shop, eat, innovate, and grow. Whether you’re an investor, business owner, or new to the world of commercial real estate, understanding the basics of CRE is essential to making informed decisions. 

At SVN | Wood Properties, our mission is to guide you through this process with clarity and expertise. Let’s dive into some common questions about commercial real estate to help you get started.

What is Commercial Real Estate?

Commercial real estate (CRE) refers to properties used exclusively for business purposes or to generate income, rather than being used as a residence. These properties are fundamental to the economy, as they house everything from small businesses and corporate offices to shopping centers, warehouses, and apartment complexes. 

Unlike residential real estate–homes occupied by the homeowner–CRE offers spaces that enable commerce, innovation, and community engagement. For example, retail properties allow entrepreneurs to showcase and sell products, while industrial properties support logistics and manufacturing. 

One of the most appealing aspects of commercial real estate is its potential for investment returns. CRE investors often earn income through leasing out properties to tenants. Additionally, property values usually appreciate over time. Whether you’re a business owner looking for a space to operate in, or an investor seeking opportunities, understanding the details of CRE is key to leveraging its benefits. 

What are the Main Commercial Real Estate Asset Classes?

Commercial real estate is organized into distinct asset classes, and these categories each serve a specific function within the industry. Here’s an overview:

• Hospitality: Includes hotels, resorts, and short-term rental properties offering accommodations to travelers and guests.
• Industrial: Encompasses warehouses, manufacturing facilities, and distribution centers. These properties are essential for logistics, production, and storage operations.
• Land: Refers to undeveloped or minimally developed land designated for future construction or investment opportunities. This asset class provides flexibility for various uses, from residential subdivisions to commercial developments.
• Multifamily: Includes apartment complexes and other residential properties leased to tenants. These properties are popular among investors for their steady rental income.
• Office: Comprises office buildings and workspaces, ranging from skyscrapers in downtown areas to suburban office parks. These properties cater to businesses of all sizes.
• Retail: Covers shopping centers, storefronts, and other spaces where goods and services are sold directly to consumers. From strip malls to boutiques, retail properties are vital for commerce.
• Mixed-Use: Combines two or more property types, such as residential, office, and retail, within a single development. These spaces are often found in urban areas and promote a live-work-play lifestyle.

At SVN | Wood Properties, we help our clients understand and navigate these asset classes to identify opportunities that align with their business or investment goals.

Common Commercial Real Estate Terms

What is a 1031 Exchange?

A 1031 exchange, named after Section 1031 of the U.S. tax code, is a powerful tool for real estate investors. It allows property owners to defer paying capital gains taxes when they sell one investment property and reinvest the proceeds into another property of equal or greater value.

This strategy is often used by investors seeking to upgrade or diversify their portfolios without an immediate tax burden. The process involves exchanging “like-kind” properties, which are real estate assets of similar nature and use. For example, an investor might sell a multifamily duplex and invest in a larger apartment complex.

Key considerations for a 1031 exchange:

• Only real property qualifies (buildings or land). Exclusions include primary residences, second homes, stocks, bonds, and partnership interests.
• Depreciable property within an exchange may have additional tax considerations.
• There are strict rules, timelines, and requirements to follow, such as identifying a replacement property within 45 days and completing the purchase within 180 days.

This strategy can help investors build wealth while minimizing tax liabilities. At SVN | Wood Properties, we’re here to guide you through the 1031 exchange process.

What is a Parking Ratio?

A parking ratio measures the number of parking spaces available at a property relative to its size, typically expressed as the number of parking spaces per 1,000 square feet of rentable space.

For example, a parking ratio of 4:1 means there are four parking spaces for every 1,000 square feet of leasable area. This ratio is an important factor in property valuation and tenant satisfaction, as adequate parking can enhance a property’s desirability.

Parking ratios are especially critical for retail and office spaces where accessibility is key to tenant success.

What is a Cap Rate?

A cap rate, short for capitalization rate, is a metric that evaluates the potential return on an investment property. It’s calculated by dividing the property’s net operating income (NOI) by its current market value and is expressed as a percentage.

Cap rates help investors compare the profitability of properties within the same market:

A higher cap rate suggests a higher potential return but may involve greater risk. A lower cap rate indicates a lower potential return but often signals a more stable investment.

By using cap rates, investors can assess which property offers the best return relative to its price and risk profile.

What are CAM Charges?

Common Area Maintenance (CAM) charges are fees paid by tenants in commercial properties to cover the upkeep and operation of shared spaces. These charges ensure the property remains functional and attractive for all tenants.

Examples of CAM charges include:

• Administrative fees
• Parking lot maintenance
• Landscaping and groundskeeping
• Security services
• Upkeep of shared amenities and restrooms

CAM charges are typically calculated based on the tenant’s proportionate share of the property’s total square footage. Lease agreements may also specify annual increases to CAM charges, often with a cap to limit excessive cost escalation.

Understanding CAM charges is critical for budgeting and lease negotiations, which is why we help you navigate these details to ensure transparency and fairness.

Why Choose SVN | Wood Properties for Your Commercial Real Estate Needs

At SVN | Wood Properties, we combine local expertise with the power of a global real estate network to provide exceptional service. Whether you’re buying, selling, or leasing, our advisors are here to guide you every step of the way.

Our Core Values:

• Grit: We tackle challenges with perseverance.
• Servanthood: Your success is our priority.
• Trustworthiness: We operate with integrity and transparency.

Our relational, passionate, and purposeful approach ensures you receive personalized solutions tailored to your goals.

Ready to explore the world of commercial real estate? Contact SVN | Wood Properties to speak with one of our trusted advisors. Whether you’re new to CRE or a seasoned investor, we’re here to help you navigate East Tennessee’s vibrant commercial real estate market with confidence.SVN | Wood Properties is your premier choice for comprehensive commercial real estate solutions in East Tennessee. We are part of the SVN International, a network of more than 2,000 advisors and staff in 200+ offices worldwide. We leverage the power of a global real estate network and local market expertise for every client we help.