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What Is Commercial Real Estate?

How It Affects the Economy and the Best Way to Invest

By

The Plaza hotel in New York City.

The Plaza hotel in New York City is commercial real estate.

Photo by George DeSota/Getty Images
health care worker

Medical buildings and hospitals are also commercial buildings.

Photo: Getty Images
inidian-workers.jpg

Office buildings are a common use of commercial real estate.

Photo: ImagesBazaar/Getty Images

Definition: Commercial real estate is any property owned to produce income, such as retail, offices, and hotels. Surprisingly, it also includes apartment buildings even though they are used for housing. That's because they are owned by a company to turn a profit. Although someone who rents single-family homes does the same thing, that's not considered commercial real estate. For that reason, sometimes data on apartment building construction or sales are lumped into reports on residential real estate. 

What else is considered commercial? Hospitals, schools and other non-profits, even though their costs are higher than their income. The category also includes vacant land that will eventually be leased, or built upon for buildings to be leased.

A third category that's sometimes considered commercial is industrial real estate. This property is used to manufacture, distribute or warehouse a product.

There is about $6 trillion worth of commercial real estate, according to the last count made in 2010. (Source: Wall Street Journal, Signs of Recovery, October 5, 2010)

How Commercial Real Estate Affects the Economy

U.S. economic output is measured by Gross Domestic Product (GDP). Construction of commercial real estate is a component of GDP.  In 2013, it contributed $436.4 billion, which was just 2.7% of GDP. This is down substantially from its 2008 high of $586.3 billion, or 4.1% of GDP.

Why did commercial real estate construction continue to peak two years after housing did in 2006? Shopping centers, offices and schools are usually built after an area has the homes and shoppers to support it. Unlike housing, it can also take several years to actually build commercial real estate.

Since commercial real estate development is built after residential, it will hit its low after residential real estate during a recessionThat's why data about commercial real estate trends is usually a lagging indicator

That's one reason that some are concerned commercial real estate loans could cause a secondary recession.  In 2013, banks held $991.2 billion in commercial loans, a 3.3% increase over 2012.  Most of this is for apartment buildings. About a third of this will come due between 2015-2017 in the form of commercial mortgage-backed securities. Just like residential mortgages, these loans were written in 2005-2007 when property values were high. That means it's possible these loans will default if prices for apartment buildings are lower. For more, see Commercial Real Estate Loan Defaults.  

The Best Way to Invest in It

The easiest and safest way for the individual investor to invest in commercial real estate is through REITs (Real Estate Investment Trusts). That's because they are bought and sold on the stock market. They also have the advantage of distributing taxable earnings to investors, similar to stock dividends. They limit your risk, since you don't have to take out mortgages to buy the actual property. Last, but not least, the properties are managed by professionals, saving you the time and money to learn how to become a commercial real estate manager. Article updated July 16, 2014

 

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