Jacqueline Kyo Thomas
Are you interested in leaping residential to commercial real estate? Congrats and good luck. Commercial real estate is a wonderful sector to explore.
However, commercial real estate can be difficult to get into when you’re coming from a residential background. This is because the two are very different in terms of market dynamics, client expectations, and transaction nuances. Commercial real estate is also not for everyone; many agents thrive on the personal nature of residential transactions, and aren't as interested in working with businesses where numbers drive the transaction.
So how do you successfully hop into commercial real estate? In this guide, we share a beginner-friendly guide that you can follow. Let’s get started.
What’s the Difference Between Residential and Commercial Real Estate?
Let’s start off easy with quick definitions of residential and commercial real estate.
What is Residential Real Estate?
Residential real estate refers to properties that are designed for individuals or families to live in. It is a segment of the real estate market that focuses primarily on providing housing, encompassing a wide range of property types that serve as a home.
These are the seven basic types of residential real estate:
- Single-Family Homes
- 1-4 Family Homes
- Condominiums
- Apartments
- Townhouses
- Manufactured Homes
- Cooperatives (Co-ops)
What is Commercial Real Estate?
Commercial real estate, also known as CRE, refers to properties that are used exclusively for business purposes. These properties are generally developed and used for profit generation through rental income or capital appreciation.
Commercial real estate is multifaceted and encompasses various types of properties. Each of these properties serves different commercial functions.
These are the six basic types of commercial real estate:
- Office Spaces - Office spaces are designated for businesses and professionals to conduct their operations. These spaces can be classified as Class A, B, or C, depending on location, amenities, and the quality of the building.
- Retail Spaces - Retail spaces are properties that house businesses such as shops, restaurants, and malls. These locations are often chosen based on foot traffic and visibility.
- Industrial Properties - Industrial properties include warehouses, manufacturing facilities, and distribution centers. These spaces are often located in areas with easy access to transportation networks.
- Multifamily Units - Although used for housing, large multifamily units like apartment complexes are often classified as commercial real estate due to their investment and profit-driven nature.
- Hospitality Real Estate - Hospitality encompasses properties such as hotels, motels, and other accommodation businesses. These properties provide lodging services to travelers and tourists.
- Mixed-Use Buildings - These are properties that combine commercial and residential elements, often with retail or office spaces on the lower floors and residential units above.
What are the Benefits of Transitioning from Selling Residential to Selling Commercial?
Now that we have a brief overview of what’s included in commercial real estate, why should you consider working in this sector of real estate? Here’s a look at the biggest benefits of getting into commercial:
Higher Commission Potential
In commercial real estate, the deals usually involve a lot more money compared to selling homes. Because of this, the amount you can make in commission for each sale is also much higher. This chance to earn more can be a big draw for agents thinking about making the switch, as it could mean a nice boost in their yearly earnings.
There are also more ways to earn. When you enter the commercial real estate field, you get to work on bigger and more varied deals. This not only means the possibility of earning higher commissions but also gives agents a chance to build a diverse and strong portfolio that can help them earn well steadily.
Business-to-Business Transactions
Moving into commercial real estate usually means working more with other businesses. This kind of work is often more straightforward because business clients usually know exactly what they want, thanks to good research and business sense.
When you work with business clients, you'll find that their choices are often based mainly on numbers and company goals. This can sometimes make the discussions simpler because decisions are more about facts and less about personal feelings. This approach helps to make the whole process smoother, with everyone clear about what they want to achieve and willing to work together towards common business goals.
More Opportunities to Specialize
The commercial side of real estate has a lot of different areas such as retail, office spaces, or factories. This means commercial agents can choose to focus on one area and become really good at it. By becoming an expert in one area, you can become the go-to person for that kind of property.
When you're in commercial real estate, you can also take the role of a consultant. That’s because your clients look to you to give them great advice and expert insights. This means helping them plan their investments, identifying market trends, and offering tips on how to develop commercial properties. This role can solidify your reputation as an industry expert.
Longer Contracts
A big plus in commercial real estate is that leases tend to last a lot longer than in residential. This guarantees a steady income for property owners which makes it a more secure investment. Agents can use this fact to attract investors who want a steady source of income.
The fact that commercial properties tend to have longer-term tenants means that you and your clients won’t be tasked with constantly finding new tenants. Instead, you can spend time growing your business and attracting more clients.
An Opportunity to Grow
Managing commercial transactions requires a unique skill set. Each deal presents its own set of challenges and requires agents to hone their negotiation and problem-solving skills continually. This can earn you a ton of professional experience that you wouldn’t get if you remained in residential.
Networking Opportunities
The commercial real estate sector is a vibrant field offering extensive opportunities to network with professionals from various industries. Networking can open doors to collaborative ventures and help you grow your business exponentially. Use networking to foster relationships that will be mutually beneficial.
What is the Easiest Way to Transition Into Commercial Real Estate?
Transitioning from residential to commercial real estate is a significant move. To make this transition smoother, here’s a step-by-step guide that highlights what you need to do to make the move:
Step 1: Acquire the Necessary Skills and Knowledge
Before plunging into the commercial sector, it's a good idea to cultivate the right skills. If you’ve earned your state license as a real estate agent, you already have the basic tools to get started. But you do need to beef up your knowledge of the following:
- Advanced negotiation techniques
- Financial analysis
- Commercial leases
- Market trends
- Real estate investing
- Property management
Acquiring these skills enables you to navigate complex transactions with confidence.
Step 2: Find the Right Brokerage
When you decide to step into the commercial real estate sector, it's important to find a brokerage that specializes in this area. Joining a brokerage that focuses on commercial properties can give you the backing you need. They will have the right experience and knowledge to guide you. Being with the right brokerage can be your first step to building a solid foundation in the commercial real estate world.
Commercial brokerages are usually staffed with real estate professionals who have a lot of experience in the commercial sector. This gives you a great opportunity to learn the tricks of the trade from people who know what they're doing.
Step 3: Find a Mentor
A mentor can accelerate your transition into commercial real estate. They can provide you with insights into market dynamics, assist in honing your skills, and guide you in making informed decisions. Seek out experienced professionals in the commercial field who are willing to share their knowledge. You may be able to find a great mentor in your real estate brokerage. Start there first. If not, extend the search to your professional network.
Step 4: Gain Hands-On Experience
To solidify your knowledge, it's essential to gain hands-on experience. Consider shadowing experienced agents to understand the day-to-day operations in commercial real estate. Engage in simulated transactions to hone your negotiation and problem-solving skills. This step is vital in translating theoretical knowledge into practical skills.
Step 5: Leverage the Power of Networking
Networking plays a crucial role in the commercial real estate sector. Focus on building connections with businesspeople in industries you wish to represent. Join relevant industry forums and communities. Attend business events that cater to the crowd you’re targeting. Through networking, you can gain insights into that particular industry's nuances and find potential clients and even mentors who can guide you in your journey.
By following this step-by-step guide, you will be able to successfully transition from residential to commercial real estate. But we’re not done yet. Let’s now look at which type of commercial real estate to get started in.
Which Type of Commercial Real Estate Should You Consider?
Here’s a closer look at the pros and cons of the different types of commercial real estate:
1. Office Spaces
Pros - Stable Income - Long-term leases, which are common in office spaces, can provide stable income. - Prestigious Clients - You have the opportunity to work with high-profile corporate clients. - Market Resilience - You can work in established office markets that have demonstrated resilience over time.
Cons - High Competition - The office space sector can be highly competitive, especially in prime locations. - Complex Transactions - Transactions for these properties can be complex and time-consuming. - Remote Work Has Slowed Growth - The rise of remote work trends may affect the demand for office spaces.
2. Retail Spaces
Pros - Diverse Opportunities - Retail encompasses a wide range of spaces from small shops to large malls. - Community Engagement - Retail gives you the opportunity to become a key player in the development of your local communities. As an agent and real estate adviser, your expert opinion can help shape your community.
Cons - Market Fluctuations - The retail sector can be sensitive to economic downturns. - E-commerce Competition - The steady growth of e-commerce is an ongoing challenge to traditional, brick-and-mortar retail spaces.
3. Industrial Properties
Pros - Growing Demand - While it demands less retail space, the rise of e-commerce has spurred demand for warehouses and distribution centers. - Simpler Leases - Industrial leases can be more straightforward compared to retail leases.
Cons - Large Investments - These properties can involve substantial initial investments. This is particularly true for large industrial complexes. - Specialized Knowledge - An agent sourcing these spaces often needs specialized knowledge in logistics and manufacturing.
4. Multifamily Units
Pros - Steady Demand - People always need a place to live. As a result, there will always be a steady demand for multifamily housing. - Residential Crossover - It may be easier to transition from residential real estate to representing clients who are interested in multifamily units. This property combines elements of both residential and commercial real estate.
Cons - Management Challenges - As a commercial real estate agent, you can work with landlords and/or tenants. Selling or representing multifamily units can involve complex management challenges which include tenant relations and property maintenance. - Regulatory Compliance - Multifamily units are often subject to strict regulatory compliance measures.
5. Hospitality Real Estate
Pros - High-Profit Potential - Hospitality has the potential for high profits, particularly in prime tourist locations. - Diverse Offerings - Offers the opportunity to work with a diverse range of properties, from small bed-and-breakfasts to boutique hotels to lavish resorts. - Network Expansion - Hospitality can provide opportunities to expand your network into the tourism and hospitality industries.
Cons - Intensive Management - Hospitality often requires intensive management and hands-on involvement. - Capital Intensive - Establishing and maintaining hospitality properties can be capital intensive.
6. Mixed-Use Buildings
Pros - Diverse Revenue Streams - Mixed-use offers diverse revenue streams. These properties combine elements of retail, office, and residential properties. - Innovative Opportunities - Mixed-use allows for creative and innovative development projects. If you like working with fresh and unique ideas, you may enjoy the versatility that working in this sector provides.
Cons - High Initial Investment - Mixed-use often requires high initial investments. - Zoning and Regulatory Challenges - Mixed-use buildings can involve complex zoning and regulatory challenges.
Which one should you choose? It’s up to you. Weigh the pros and cons of each to decide which sector may work best for your unique skill set. Many agents start off with multifamily units as an easy transition into commercial. Whatever sector you choose, start small and build your momentum.
Final Thoughts
Use the above tips to get started in commercial real estate with a solid footing. Transitioning from residential to commercial involves learning new skills, understanding different market dynamics, and connecting with a specialized brokerage that can guide you on the path to success.
The journey might be challenging at first, but with the right guidance, you can forge a rewarding and prosperous career in the commercial real estate sector. Take one step at a time and don't be afraid to dive deep into specializations that genuinely interest you. Good luck!