Plain Language #1 : Understanding CRE Terms & Categories
Like any industry, commercial real estate (CRE) is awash with its own jargon, acronyms, and insider lingo. Naturally, some of this is relatively straightforward and widely used, such as using the acronym ‘SF’ for square footage. However, if you are not in CRE or related industries you would be forgiven for not having a working knowledge of ‘air rights’, ‘brownfields’, or the difference between ‘core factor’ and ‘load factor’.
Here are three key, fundamental CRE terms, plus a bonus brief on zoning:
1. Multifamily Property
In one sense, a multifamily property does what it says on the label: it is a property occupied by multiple ‘families’. Scratch the surface, though, and it quickly becomes apparent that multifamily is multipurpose.
Outside of CRE professional circles, there can be a lot of slippage in use between terms like condos (or condominiums) and apartments. If you’re a CRE professional, on the other hand, there are clear and legal differences between the two – specifically in ownership models – making multifamily a descriptor or, perhaps, handy umbrella term for a category.
Residential real estate is the consumer-facing side of the multifamily coin – finding a family a place to call home. In CRE, a multifamily property offers an investor a means of mitigating risk because the property income is not predicated on a single residential tenant.
Here again, retail is a familiar term that can be used as a synonym for shopping. In CRE, though, the retail includes everything from a single big box store, to a shopping center with many store owners and operators. Retail can also be a component in a mixed-use development.
Retail tends to be very attractive to the CRE investor market, as it is traditionally associated with high yields, longer leases, and – in the case of net leases – low maintenance. A brokerage may also offer a range of services specific to retail investors (such as property management or consultancy) and/or to the tenant.
As with many other investment vehicles, higher returns can go hand-in-hand with higher risks. If an area takes a sharp turn for the worse, all the retail tenants in a property might suffer, and (as 2020 illustrated), an economic downturn or pandemic lockdown can introduce an unexpected rental crunch.
3. Office Space
Like a retail property, office space is a commercial real estate category defined by purpose. A retailer may have an office in their store, but their purpose is selling. A tenant in office space may offer limited sales, but their primary function (and the majority of the physical space) is dedicated to ‘office work’. An office space property can be occupied by a single company or many; or dominated by an anchor tenant (much like in retail) with smaller parties directly or sub-tenanted.
Depending on the region, most office space is ranked in classes A, B, or C. What goes into each class though is not a strict science and will depend on where in the world you’re operating and – that ephemeral thing – local insight.
Get in the Zone
With all of the above, zoning is the critical factor that determines what a space can be used for and is set by the local planning authority (LPA), not by the whim of the buyer or seller. Space can also be sold with alternative zoning rights already acquired, which can dramatically change the value of a space. That’s why a local area expert, with in-depth knowledge of the LPA and zoning – like NAI Professionals – is a critical success factor in the hunt for commercial real estate or any plan for further development.
Of course, there are hundreds of other CRE terms to define and unpack; this is just the tip of the iceberg. Check back next week for mixed-use developments, land, and industrial CRE.