The differences between CRE and resi
In 2019, the total value of all property, globally, was estimated at $228T. Of this, commercial real estate is estimated at $33T (almost half the value of the entire global equities market). By value, there is roughly 5 times more residential real estate than CRE (the balance is made up of other property).
Very simply, the property industry is made up of three types of players
- Property funds or owners who own the property (and the property managers who manage property on their behalf)
- The tenants who rent the property
- The businesses who serve either these businesses (brokerages/agencies, valuers, debt funders, insurers, councils etc.), or outsiders interested in this asset class (analysts)
This is where the similarities end. Beyond residential dwellings, commercial real estate is complex.
A non-homogenous asset class
Residential, to overstate the obvious, is generally made up of houses or apartments.
On the other hand, commercial property itself is divided into five categories: retail, office, industrial, multifamily, and other (for more info, please see here). Inside of these five categories, there are further sub-categories. For example, industrial boasts the following sub-categories: factories, logistics, mini warehouses, data centers, refrigeration/cold storage etc.
Inside of these sub-categories, each property has attributes that are specific to its asset type. For example, in evaluating warehouses, height to eaves is important, while in shopping centers, the layout of the asset is important – particularly in relation to the location of anchors and line shops.
Parent-child data relationships
The key word here is hierarchies. This structure is the biggest difference between CRE and resi.
In commercial real estate, within one property, it is common to have this hierarchical breakdown:
- one property
- made up of many buildings (sometimes with different building names)
- each with various building components
- comprising many floors
- broken up into units (with a unique identifier)
- with some units having the characteristics of complex space
While easy to make sense of when looking at a property, it is a complex concept for industry outsiders to understand.
Unlike residential property, one unit is not the same as one property.
Commercial properties are generally multi-tenanted. So you will have one property, made up of many leased units.
Further, commercial properties may have multiple vacancies. Thus you may have one property, that is made up of many let and unlet (or vacant) units.
A final plot twist (describing the instance of an entire property for sale, with some or all units being both to let and for sale, at the same time), is unpacked here.
To let stock is “public”
This varies from geography to geography. However, in the general case, the representative of the tenant seeking space has the ability to transact with any landlord who has vacant space (either directly, or via a landlord’s agent).
Unlike residential property, one competent CRE agent can access near complete leasing opportunities.
This is very different from residential, where (generally) agents secure mandates to transact on specific stock. And you are required to engage with many agents to get decent coverage.
The difference between CRE and resi is significant. For more information on common CRE misconceptions (specific to South Africa), please see here.
Competence of CRE professionals
Unlike residential, CRE professionals require high levels of skill to deliver a professional level of service.
For example, addressing the niche of brokers or agents, high quality service is dependent on the following four (not exhaustive) factors
- Access to data
- Efficiency
- Relationships
- Experience
For more detail on the above, please see this article on the 5 types of CRE deal makers.
Data complexity
As a result of the diversity of the asset class, it is not unusual for a single property to have at least 1.6K different data field options available for capture.
Secondly, CRE revolves around three of the four enterprise data assets. Vehicles are excluded. CRE professionals are required to manage data relating to (1) businesses (tenants or owners or service providers), (2) contacts (the humans relating to these businesses), and (3) properties. Further, such professionals are required to manage the data around leasing and sales deals, units, leases, nodes, and document and image data.
Data is indeed the oil that CRE runs on (for more info, please see this article). And there are no short cuts to embracing the data rigour that is required here.
CRE jargon
As with many niche, complicated industries, CRE comes with its own language. For example, consider the terms GLA, or LTV, or TIA, or even gross rentals?
The terms in this space are many, and confusing. And further, the same words may have different meanings across different organisations.
For an overview of common CRE terms (and some other related words), please see this CRE dictionary, that will hopefully be useful to industry outsiders and insiders alike. Why? We believe that a common CRE language can reduce inefficiency. We also believe that democratising this knowledge helps to educate industry outsiders. And an educated client, in our opinion, is a more discerning, humble and trusting client. The more clients are empowered, the smoother deals flow.
Some myth-busting
Many people assume that CRE is the same as residential.
As a result, a lot of residential principles are deemed to be carried over, incorrectly, to residential.
Here we try empower you with the truth around 7 myths
Conclusion
From the outside in, it is possibly easy to underestimate the differences between CRE and resi. Certainly CRE industry insiders, who are “unconsciously competent”, tend to undervalue their hard-earned knowledge, gained over many years. And thus there is a tendency to overlook the challenge that new entrants to the industry face.
It is our hope that the above has unpacked the complexity behind this asset class, and helped you chart a course for mastery.