Commercial Real Estate 101

Mar 15, 2024

How To & Education Commercial Real Estate

“To be successful, you have to have your heart in your business, and your business in your heart.” – Thomas Watson, Sr.

When you think of real estate, your mind may automatically land square on a white-picket-fence tree-lined suburb street packed with pastel-painted single-story homes. However, the umbrella term encompasses a lot more than just where we lay our heads at night.

So, let’s take the time to break down another key corner of the housing market and give you the details you need to stay knowledgeable and connect buyers and sellers to sales that go above and beyond just residential.

In this complete guide, we'll cover:

What Is Commercial Real Estate?
Types Of Commercial Real Estate
Why Invest In Commercial Real Estate?
Commercial Real Estate Return Metrics
How To Find LLC Principal
How To Find Commercial Real Estate Owners
Marketing To Commercial Real Estate Owners

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What is Commercial Real Estate?

The opposite of residential, commercial real estate indicates property that is zoned for and intended for business use.

Grocery store? Commercial real estate. Your favorite restaurant down the street? Commercial real estate? Factories, warehouses, shopping malls, office buildings? All commercial real estate.

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Naturally, a lot of varied properties fall under this bucket – which makes the statistic that commercial real estate is estimated to be worth over $20.7 trillion a lot more reasonable.

Think about it this way. Not only are businesses occupying these spaces paying dues for prime placement in your communities, but they are often churning out additional profit in goods and services.

There is a lot of revenue flowing through these organizations and differing storefronts, which can mean a whole lot of opportunity for you to outreach, connect, and discuss additional strategies to help them scale and grow.

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But, understanding the owner behind any given commercial property space is a lot more complex than knocking on the front door. Typically, businesses lease these spaces from larger LLCs, which means you’ll need to do some serious research and skip tracing to connect to the individuals with buying power.

Intimidated? Don’t be. We’re here to break it down. But first, a few basics.

Types of Commercial Real Estate

Just as there are multiple breakdowns within the residential space, the same applies to commercial. Let’s start with the leasing structure.

Leasing Structures In Commercial Real Estate

One leasing structure does not fit all when it comes to commercial real estate.

The tenant and commercial property owner can choose to split expenses in varying ways. The most common breakdowns are listed below:

Single-Net Lease: The tenant pays property taxes and rent, while the landlord pays other operating costs and expenses.
Double-Net Lease: The tenant pays for property taxes, insurance, and rent, while the landlord covers repairs and maintenance needs.
Triple-Net Lease: The tenant pays rent, taxes, insurance, and maintenance.
Gross Lease: The tenant only pays rent, while the landlord takes on the remaining expenses.

Want more details? Read on for leasing structures in commercial real estate.

Now, let’s dig a little deeper into the subtypes of commercial real estate.

Subtypes of Commercial Real Estate

Commercial real estate is categorized by subtypes that depend on varying factors from property location to quality to overall aesthetic: Class A, Class B, and Class C.

These categorizations help inform investors on the overall status of a property – which can be hugely beneficial when making the final decision on where and how to expand your commercial portfolio.

Generally, Class A represents the best of the best. Prime location and overall top-of-the-line. Class B is less competitive, slightly older, and may need a degree of repair. Class C properties are often over twenty years old, need serious work, and are in less desired locations.

Looking for a fuller breakdown? View our subtype analysis.

Asset Classes of Commercial Real Estate

What exactly is an asset class? It’s a category of investments that are grouped depending on potential performance.

Generally, asset classes for commercial real estate are: Office, Retail, Industrial, Hospitality, and Multifamily.

Office: Office buildings, corporate space, and medical offices are all part of the office asset class.

Retail: Shopping plazas, malls, retail shops, and stores are part of the retail asset class.

Industrial: Warehouses, processing plants, cold storage, manufacturing, and distribution centers are all part of the industrial asset class.

Hospitality: Hotels are the primary example of the hospitality asset class.

Multifamily: Residential units not owned by residences (so apartments, student housing, senior communities, etc.) belong to the multifamily asset class.

Learn more about commercial asset classes and which may be right for your investment dollars.

Why Invest In Commercial Real Estate?

Just like with any property in the real estate business, there are pros and cons of venturing into commercial investing. What may be right for some may not be right for others. Let’s break down a few of the risks and benefits of throwing your hat into the ring.

Benefits of Commercial Investing

Lease Contract Lengths: Tenants are typically locked into commercial leases for longer periods than in residential real estate (generally one to ten years). With this in mind, commercial property investors won’t need to worry about the annual marketing and hunt for new tenants that come much more frequently in the residential space.

Steady Cashflow: With these longer leases, investors can expect to receive more steady and predictable monthly payments, especially if they’re intentional about tenant selection and property location. Established neighborhoods and areas in which additional building and competition are not possible will drive lease rates up even further.

Appreciation of Capital: Just like any property, commercial buildings are set to gain value as the areas around them continue to develop. Focus on keeping the property up-to-date with renovations and repairs to ensure high rates moving forward.

Cons of Commercial Investing

Regulations: There is a whole lot of red, orange, and yellow tape in the commercial investing world. With differing regulations that can change per city, per county, per state – it takes an extremely knowledgeable investor to jump into the commercial world. Zoning responsibilities, taxes, and more are just a few aspects of the commercial process that may require advanced understanding in order to be done right.

Turnover Risk: We know the economy (and the environment) can impact the success or failure of commercial businesses – just take the combination of retail shops, community restaurants, and COVID-19 as a recent example. If businesses fail and shutter their doors, commercial owners must find new tenants – and fast. Making sure the tenants and their businesses are solid is a hefty requirement for making commercial investing work.

Cost: Depending on the condition of the property, commercial real estate can easily equate to a lot of upfront costs. Beyond repairs and regulations (which can already be high cost), certain tenants may want to renovate, which can delay their move-in and drive dollar signs up even further.

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Commercial Real Estate Return Metrics

With buying and selling residential real estate, getting a singular home across the finish line, and the commission check that follows are signs of a job well done. The same doesn’t necessarily apply to commercial real estate.

So, what does success look like for these property types?

When investing in the varying classes of commercial real estate, there are a handful of helpful metrics to look to when gauging success. Let’s break them down.

drive-for-dollars-team Cash-on-Cash Return: Cash-on-cash return examines yearly cash distribution back to investors as a % of total equity invested in the initial property.

Equity Multiple: Equity multiple takes the sum of equity distributions (cash) invested divided by total equity invested. This lets investors know how much they could make back (regardless of the time it takes).

Internal Rate of Return (IRR): This should land between 7-20%. IRR examines the return on investment over the projected hold period (essentially, how fast money is going to get back to investors). There are other factors that bubble up into this metric, including risk, that you should consider. The higher the risk, the higher that IRR % should be. For high-risk deals? 15-20%. Low-risk? 7-11%. Let’s fold in those hold periods (which can vary!) For shorter hold periods (3-5 years), IRR should be 15-20%. For longer hold periods, low teens and high single-number percentages are normal.

Now that we’ve broken down differing types of commercial real estate, let’s continue on to taking advantage of these rich opportunities in the market, and discuss finding and contacting the appropriate parties to talk sales.

How To Find LLC Principal

Whether you’re a commercial realtor or maybe even a small business owner, there’s ample opportunity to connect with LLCs that may own one or more commercial properties in your community.

hyperlocal-marketing-step-by-step (2) So, how do you find them? What tools do you leverage to better understand what potential property owners may be willing to sell? Or want to buy more and scale their reach?

We’ve got 5 simple approaches for you to leverage when searching for LLC owners.

Finding Commercial Real Estate Owners

Not every commercial property is owned by a large LLC. In many instances – such as with smaller multifamily buildings – there may be an individual absentee owner who is a prime prospect to contact for sale opportunities.

Let’s break down why these prospects may be ideal for your outreach and how exactly to connect with them.

Why Are Commercial Absentee Owners Good Prospects?

Absentee owners are those who own property they don’t primarily reside in. While many may own residential investments (such as second homes, vacation rentals, Airbnbs, etc.) – we’re here to focus on the commercial side.

A few examples of absentee owners that are excellent prospects in the commercial space may include:

Free and clear landlords ready to retire
Out-of-state (or out-of-country) commercial owners tired of managing from afar
Office owners near foreclosure due to the sharp rise of WFH
Class C property owners looking to sell

The punchline? There’s a lot of variety across both absentee owners and commercial property types, and plenty of circumstances that may lead to these owners wanting to sell.

Which brings up our next question. We now know how to find LLC owners. But what about owners that can’t be found at the property you’re looking at?

How To Best Connect With Commercial Absentee Owners

Sounds like you need a little help from skip tracing.

match-offer-and-lists (1) Skip tracing is the process of finding and reaching out to an individual that may be difficult to find.

If we think about this in the context of commercial real estate, naturally, not being able to simply send mail to a particular address or call that business up and speak to the property owner classifies finding commercial owners as a difficult task.

But don’t worry, we’re up to the challenge.

Read on to learn 4 ways to find and contact the owner of a property.

Marketing to Commercial Owners

Now that you’ve been able to successfully find the prospects you want to reach out to –what’s the best way of marketing to them?

Remember, commercial is a different ballgame than residential. It’s not as simple as knocking on the front door. So, let’s take a quick look at various methods you can leverage to get a word in with your community commercial owner.

By Direct Mail

Effectively skip-tracing to deliver impactful direct mail to commercial owners is a productive way to get your foot in the door and bypass a tenant’s mailbox.

Use public records or lead generation software to look beyond what business is currently renting the space and dig deeper to find the actual owner’s contact information (including a separate mailing address).

Read more about our tips and tricks for making sure your direct mail marketing can break through the noise.

By Phone

You can utilize the same skip-tracing methods to narrow down and find an owner’s phone number. However, be warned that commercial property owners are most likely dealing with more calls than traditional residential property owners (consider each of their tenants!)

If you do choose to go this route, ensure to leave a detailed voice message stating your name, contact information, and a succinct sentence detailing your offer (and why it may be a great fit for them). Personalization is key here, as is flexing confident communication.

phone-voicemail Read more with our pro guide to phone and text message marketing.

By Email

High open rates make email a form of outbound messaging you shouldn’t ignore. Looking to break through the spam filter and get noticed? Plug in personalization wherever you can (custom subject lines can up that open rate 29-50%).

direct-mail-mktg-integrations (1) Looking for templates and additional guidance to help you succeed? Read more on our 7 real estate marketing email templates you can create.

By Digital Advertising

Commercial investors and property owners are steadfastly online (over 80% of modern buyers and tenants begin their searches this way; after all – they can’t miss an opportunity to connect).

Therefore, this opens up a productive path forward to reach commercial owners in spaces they regularly frequent. How do you ensure you market to them successfully? Tap into your custom audience and targeting skills to ensure you’re reaching who you want with the message you want.

Learn more about using targeted marketing across social media and digital platforms.

Use PropertyRadar To Unlock Your Next Commercial Real Estate Leads

Commercial real estate is a complex corner of the market, but opportunities within this space can be incredibly fruitful if you know where to look.

To productively find the commercial owners you’re looking for, leverage PropertyRadar, a revolutionary data-driven resource for property professionals that puts the immense power of public records information right into the comfort of your pocket.

office-field (1) Providing information on over 150 million properties and 250 million people, your search to find that elusive building owner stops here.

We provide you the path to discovery and open up a treasure trove of opportunities to connect with individuals that just may turn into your next quality prospects.

Want to learn more? Read all about PropertyRadar and the benefits it can bring to your business. Eager to get started? Try a no-obligation free trial on us, and let us know what you think.

So, what are you waiting for?

Dive into commercial real estate with a free PropertyRadar trial, and tap into over 150 million properties nationwide.