Commercial REITs: Investing in Income-Producing Properties

Commercial properties REITs are real estate investment trusts that specialize in commercial properties. The REITs operate like mutual fundsMutual FundsA mutual fund is a pool of money collected from many investors for the purpose of investing in stocks, bonds, or other securities. Mutual funds are owned by a group of investors and managed by professionals. Learn about the various types of fund, how they work, and benefits and tradeoffs of investing in them, where investors contribute funds to a central pool to purchase commercial properties. It gives them the required exposure to commercial real estate investments without having to buy properties on their own.

Summary

• Commercial properties REITs refer to real estate properties that are primarily used for business purposes, such as offices, hotels, retail stores, etc.
• Commercial REITs trade shares on the public exchange market, and investors can become shareholders by buying shares of these companies.
• Compared to residential REITs, commercial REITs are preferred by investors who are looking for higher returns on their investments.

How to Invest in Commercial Property REITs?

Real estate may be categorized into residential, industrial, and commercial properties. Commercial properties provide workspace for business activities, and they include office buildings, hotels, manufacturing buildings, convenience stores, etc. Compared to residential properties, commercial real estate is considered a sound investment since they provide higher returns.

However, it also means that the investor will have to incur huge costs to set up real estate propertiesReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc. and customize each unit according to each tenant’s preferences. An investor interested in investing in commercial properties can choose to make investments either directly through the ownership of a real estate property or indirectly through owning shares in REITs that invest in real estate.

1. Direct investment

Direct investment requires a considerable high amount of capital to finance new construction and acquire existing commercial buildings. Commercial properties are a high-risk, high-return investment. It means that people who invest directly into such properties must possess significant knowledge about the industry and a large amount of capital.

Direct investments are suitable for high net worth individualsHigh Net Worth Individual (HNWI)A high net worth individual (HNWI) refers to an individual with a net worth of a minimum of $1,000,000 in highly liquid assets, such as cash and cash and institutional investorsInstitutional InvestorAn institutional investor is a legal entity that accumulates the funds of numerous investors (which may be private investors or other legal entities) to. To learn more about financing direct investment in commercial real estate, consider CFI’s Commercial Real Estate Finance SpecializationCommercial Real Estate Finance SpecialistCFI's Commercial Real Estate Finance Specialization is a series of 9 courses plus a Commercial Mortgage case study. Enroll today and advance your career! program.

2. Indirect investment

Indirect investment is the most popular method of investing in real estate without spending too much capital or being directly involved with the property. Investors get to own commercial real estate by purchasing shares in a real estate investment trust that specializes in commercial properties.

REITs develop and own commercial real estate, and investors can purchase their shares in the same way they purchase stocks and bonds. It also means that investors will own properties without taking any mortgagesMortgageA mortgage is a loan – provided by a mortgage lender or a bank – that enables an individual to purchase a home. While it’s possible to take out loans to cover the entire cost of a home, it’s more common to secure a loan for about 80% of the home’s value., as is the case with direct investment.

Investors get a share of the net revenues, which are distributed to shareholders as dividends. REITs are managed by an experienced team of professionals, which saves investors the hardships involved in dealing with difficult tenants. To learn more about publicly traded securities and other capital marketsProgram Page - CMSAEnroll in CFI's CMSA® program and become a certified Capital Markets &Securities Analyst. Advance your career with our certification programs and courses. concepts, consider some of CFI’s courses on these subjects.

Top Commercial Real Estate Categories

Commercial property is defined as any property that is exclusively operated to provide a workspace to businesses, which, in return, pays monthly rental income for using the premises. The following are the main categories of commercial real estate:

1. Retail stores

Retail stores sell smaller quantities of products to the end consumer. They typically get their products from manufacturers or distributors at a discount and then resell them at a profit. Retail stores comprise shopping malls, big-box retailers, discount stores, grocery stores, supermarkets, beauty salons, etc.

2. Hotels

Hotels are commercial establishments that provide lodging, meals, and other services to their guests on a short-term basis. The rooms are usually numbered to make it easy for guests to identify their rooms.

Hotels may include motels, business hotels, as well as business resorts that accommodate travelers or people on holiday. The hotels category excludes homes that rent out their rooms to guests through the Airbnb service.

3. Office buildings

Office buildings are building spaces that are rented out to tenants for the purpose of conducting businesses related to consulting, clerical services, administration, and other businesses related to offering services to clients. An office building is designed in a way that it can host single or multiple businesses. Office buildings often house businesses that deal with legal services, architecture, IT solutions, business consulting, trading, and medical practices, among others.

4. Industrial buildings

Industrial buildings are primarily used for the production, distribution, or storage of a good. Some industrial buildings are not considered commercial, especially if they are built on land set aside for factories or those zoned as industrial land. For example, a building used for storing manufactured goods awaiting dispatch may be classified as a commercial property.

Commercial Properties vs. Residential Properties

From an investor’s perspective, commercial properties are often considered a sound investment compared to residential properties due to the higher returns associated with the former. Although they cost more to acquire, commercial properties are likely to bring in higher rental incomes, especially when the building houses high-value clients such as multinationals, banks, NGOs, and law firms that plan to lease the space over the long term.

Also, there are fewer hurdles when dealing with corporate clients. Many companies take up whole floor spaces or multiple floors in a business complex compared to individual clients who usually occupy a maximum of one unit in a residential building.

Residential property owners offer less flexibility in terms of leasing terms, since some tenants may not have plans of staying in the unit over the long term. Also, when pricing residential units, property owners need to make various considerations, such as amenities on site, location, accessibility, emotional appeal to potential tenants, etc.

If clients are not attracted to the residential units due to a lack of accessibility, lack of specific amenities, or other factors, the property owner needs to do extra work to fill up the units at any given time, which can result in downtime where there is no rental income.

Additional Resources

To keep learning and advancing your career, the following resources will be helpful:

• Current Income (Real Estate Investments)Current Income (Real Estate Investments)Current income is an investment strategy that gives investors exposure to consistent above-average payouts. The most common current income-focused
• Office REITsOffice REITsOffice REITs are REITs that build, manage, and maintain office buildings, and they lease the offices to companies that need space to accommodate their staff
• Residential Properties REITsResidential Properties REITsResidential properties REITs are REITs that own and manage residential units for renting out to tenants. They may be either single-family or multi-family structures
• Commercial Real Estate Fundamentals