Understanding Commercial Real Estate: Players, Property Types and Lifecycle

Commercial real estate (CRE) is a vital component of the economy, providing the infrastructure necessary for businesses to operate and grow. In the US, in 2023, new commercial building development and the operations of existing buildings led to direct spending of $913.1 billion. This boosted the economy by $2.5 trillion in GDP, supported 15 million jobs nationwide.

This post explores the various stakeholders, property types, and major phases of the building lifecycle, essential for navigating the CRE sector

CRE Stakeholders

In commercial real estate (CRE), various stakeholders play critical roles in the lifecycle of properties, from ownership to management and development. Understanding these key players helps navigate the complexities of the industry:

1. Property Owners: Individuals or institutions that own commercial real estate assets.

2. Tenants: Businesses or government agencies leasing space for operations.

3. Developers: Entities responsible for planning, financing, and constructing properties.

4. Property Managers: Firms handling the daily operations, maintenance, and leasing of properties.

5. Brokers: Professionals facilitating the buying, selling, and leasing of properties.

6. Lenders: Banks and financial institutions providing financing for property transactions.

7. Contractors and Consultants: Companies and specialists involved in construction and advisory services.

8. Local Government and Regulatory Bodies: Authorities enforcing zoning laws, building codes, and regulations.

9. Community and Local Stakeholders: Residents and local businesses affected by commercial real estate activities.

CRE Property types

CRE is made of a wide range of property types used for business purposes. Below are some of the main categories:

1. Office Buildings: Properties used by businesses for general office operations, ranging from small single-tenant buildings to large skyscrapers.

2. Retail Spaces: Properties where businesses sell goods and services directly to consumers, including shopping centers, malls, and standalone stores.

3. Industrial Properties: Real estate used for manufacturing, production, storage, and distribution, such as warehouses, factories, and logistics facilities.

4. Multifamily Properties: Residential buildings designed to house multiple families, with units rented out to tenants, such as apartment complexes.

5. Hotels and Hospitality: Properties providing lodging and services to travelers, including hotels, motels, and resorts.

6. Mixed-Use Developments: Projects that combine different types of real estate, such as residential, commercial, and retail spaces, within a single development or property.

7. Data Centers: Specialized facilities used to house servers and IT infrastructure, critical for businesses relying on cloud computing and large-scale data storage.

8. Self-Storage Facilities: Properties offering storage units for rent, used by individuals and businesses for storing personal belongings or business inventory.

9. Healthcare Real Estate: Properties used for healthcare services, including hospitals, clinics, medical offices, and assisted living facilities.

10. Timberland: Land primarily used for the growth and harvesting of timber, which can be an investment in both the land and the timber produced.

Commercial Real Estate Building Lifecycle

The building lifecycle in commercial real estate is made of phases, each essential for the successful development and management of a property.

Pre-construction

Pre-construction activities and costs, often referred to as soft costs, include expenses related to planning services incurred before the construction phase. Few example are architecture, engineering, legal services, marketing, management, and administration.

• Planning: it involves identifying the problem or need and analyzing potential solutions.

• Programming: this is where a solution is selected, and the project's objectives clearly defined in terms of high-level scope, budget, and schedule.

• Design: it focuses on creating detailed drawings and specifications that guide the procurement and construction processes.

Construction

During the construction phase, contractors turn the plans and specifications into a physical structure. This phase can be subdivided into specific work packages, including site works, hard construction, and tenant improvements.

• Site works involve site preparation, grading, landscaping, and paving.

• Hard construction pertains to the physical building process,

• Tenant improvements focus on interior modifications tailored to tenant needs. These can be categorized as Cat A (basic fit-out) or Cat B (customized fit-out).

Post-construction

• Operation phase takes over the construction. This involves using the building for its intended purpose while performing ongoing maintenance. It is the day-to-day property management and routine maintenance to ensure the building operates efficiently.

• Decommissioning occurs when the building is no longer in use. This may involve demolition, recycling of materials, or repurposing the building for alternative uses.

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Reference

·  Lewandowski, Brian, Adam Illig, Ethan Street, and Richard Wobbekind, PhD. "Economic Impact of Commercial Real Estate." NAIOP, 2024.

·  Charette, Robert P., and Harold E. Marshall. UNIFORMAT II Elemental Classification for Building Specifications, Cost Estimating, and Cost Analysis. 1999.