Commercial Building Definition

A commercial building definition is one in which at least 50 percent of its floor space is used for commercial activities, such as retail, the providing of services, or food service (restaurants and the like). For example, a building in New York City that is 10 stories high with 6 of floors being dedicated to apartments or residential dwellings, with the remaining 4 floors being dedicated to commerce, would not be considered a commercial building.

Additionally, a commercial building (or, land) may also be defined as a space that has the potential for being one that brings in income.

Additional qualities of commercial real estate include:

  • A space that allows companies to carry out day-to-day operations and serve customers or clients. As such, a commercial property does not strictly need to be a store or restaurant; it can also be a space in which income is being generated by providing services to people, such as a law office or a doctor’s office.
  • Schools do not qualify as being commercial real estate; however, places of worship and lodging entities such as hotels, may be qualified as commercial properties.
  • Unlike residential rental properties, in which a tenant pays a set monthly fee for the entire apartment (and, that is how the lease agreement is spelled out), commercial property leases are generally drawn up in such a way that the occupant is paying a certain amount per square foot of space.

Types of Commercial Properties

Within the scope of commercial properties, there are generally six different types:

  • Office
  • Retail
  • Industrial
  • Multi-family
  • Land
  • A miscellaneous catch-all category that essentially covers everything else

Commercial properties that are defined as office properties can range from a single-tenant space to a skyscraper, and everything in between. Further classifications then exist as buildings are designated as Class A, B, or C.

  • Class A buildings are considered to be the cream of the crop. They are often newer construction with better amenities and infrastructure. However, a Class A building may be an older building that underwent a great deal of remodeling. Generally, they are professionally managed and located in a prime area with easy access to other points of interest.
  • Class B buildings are usually the ones that are the most sought after by investors because even though they tend to be a bit older, they can still bring about a significant return on investment with some renovations and upgrades. Typically, a Class B building is decently maintained and well-managed.
  • Class C buildings are generally over 20 years old, located in less desirable areas, and not nearly as well managed or maintained. These buildings are typically in greater need of renovations, and in turn, charge less for their leases to make up for the lack of maintenance. Given the poorer quality of the property, these spaces tend to remain vacant longer than either a Class A or Class B commercial property, which makes them prime targets for redevelopment opportunities.

Retail or restaurant commercial real estate properties can either be free-standing buildings or they can typically be found in the lower floors of a larger building, particularly in more urban settings. This is especially true of such entities as banks and coffee shops. In less urban areas, shopping malls or strip malls (sometimes also called strip centers) are often the key sites of commercial real estate properties.

A strip center is generally viewed as being an unenclosed space that houses multiple retailers, covers from 5,000 to over 100,000 square feet, and has a tenant that serves as something of an anchor store, such as a large supermarket or a TJ Maxx, with the remaining stores being smaller retailers, either in name or space.

A shopping mall, on the other hand, is generally 400,000 to 2 million square feet and may have several anchor stores, like a Macy’s, Nordstrom, and Sephora. The remaining stores may run the gamut in terms of size, national name recognition, and price point, as you may find a Payless Shoe Source right across from an Aldo or Ferragamo, depending upon location and average clientele of that particular shopping mall.

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