Understanding the Commercial Real Estate Industry
CRE 101
If you are new to the industry, this is where to start. I break down the basics of the industry relative to property types and groups involved.
The Basics
What is commercial real estate?
Commercial real estate (CRE) is effectively any building that the owner leases to someone in exchange for money (rent). It is everywhere you look. If you are in a building that you or your family does not own, chances are high that you are in CRE.
Property Types
The major asset classes
CRE is filled with many industry specific terms. “Asset Class” refers to the type of property and how it is used. Each asset class is different not only in its use but in its construction and location.
1-4 unit residential
Homes or smaller apartments that qualify for personal financing.
Industrial
Warehouse buildings used for storing, distributing, and/or manufacturing stuff.
Multifamily
4+ unit apartment buildings or communities, often with amenities.
Office
Office buildings where people work, mainly on computers.
Retail
Physical stores (not online). Examples: restaurants, grocery, Costco.
Data Center
Warehouse building full of computers powering AI and the internet.
Industry Players
Groups with financial ownership
These are groups that have invested money to own or lend against a specific property or group of properties. They have “skin in the game”.
Owner / General Partner (GP)
The owner could be a single person, a group of people, or a company. The owner oversees the day to day management of the property. If the owner raises money from investors, the owner is also known as the general partner (GP). Some owners buy properties already constructed. Some owners develop the properties. They are known as developers or a development company.
Investor / Limited Partner (LP)
An investor who invests in a property with limited rights and day-to-day involvement through the structure put together by the owner/GP.
Lender
Whereas an investor has an equity ownership position in a property, the lender loans money to the owner in exchange for a monthly interest payment.
Industry Players
Groups providing services
There are many other groups in the CRE industry without a financial interest in a property. These groups provide services to owners and lenders.
Brokers
Brokers specialize in selling buildings, representing buyers, representing owners (landlords) and tenants in leasing space, placing loans, and finding equity. All of this is done for a commission.
Vendors
Vendors provide services for a property to the owner. These could include maintenance of HVAC units, minor repairs of windows and doors, or ongoing support of landscaping and pest control.
Title & Escrow
Title companies track documents various rights to the property and ownership history. Escrow company acts as a neutral 3rd party to facility the sale of a property or the placement of a loan on a property.
Property Managers
Property managers run the day-to-day operations of each property, interfacing with tenants and vendors. They usually have an accounting staff on their team that does the monthly reporting and cash management.
Construction & Design
More complex building support is needed for major remodels and new development. General contractors are used for construction. Architects and engineers are used to support the design and permits.
Specialty Services
There are many other groups that provide services such as legal, valuation / appraisal, audit as required by LPs and lenders, tax returns, property and liability insurance, and various specific advisory services.