Defining residential real estate is simple: it is properties where people live or reside. There is some disagreement, though, when defining commercial and industrial real estate. If one agrees that commercial property is used to generate profits, then industrial property is a category of commercial property. However, in practical terms, they are separate forms of real estate, and this article will unveil the key differences.
Industrial properties are used for the manufacture, storage, and distribution of goods or products, while commercial properties are typically rented spaces where “commerce” or trade takes place, such as the selling of goods and services to customers in retail outlets, restaurants, and offices.
That’s a basic explanation, but there’s more to understanding the difference between industrial and commercial properties. Getting into the details is not just an academic exercise – a potential investor needs a clear picture of what each category offers, which is the safer option, what returns can be expected, and the advantages and disadvantages of each. Let’s investigate industrial vs. commercial real estate.
Industrial Vs. Commercial Real Estate – The Key Differences
The differences between industrial and commercial real estate are physical, regarding how the buildings are designed and constructed, and functional in terms of what operations are conducted from those properties.
Industrial Vs. Commercial: Location
The impact of industrial properties on the surrounding area is very different from that of commercial real estate, so the location requirements are specific to each.
The primary purposes of industrial real estate include:
- Manufacturing
- Processing
- Storage of goods
- Distribution of those goods
Land needs to be relatively cheap as large areas are required to build factories, warehouses, and distribution centers, so industrial parks are on the periphery of cities, close to sea ports, rail- and road- networks, and far from more expensive residential areas.
Commercial Properties
Properties that are developed to provide goods and services to the public need to satisfy several criteria to succeed:
- High foot traffic of the right type, meaning the relevant LSM (living standards measurement) group.
- Easy access by all forms of transport, close to main arterial routes and residential areas.
- Maximum exposure with good visibility and prominent signage.
Industrial Vs. Commercial: Building Design
Different in scale and function, industrial and commercial buildings are all purpose-designed to suit the usage, the market, and the location.
Industrial Buildings
These vary from small mini-units to gigantic structures and may include:
- Small factories or processing plants
- Warehouses
- Workshops
- Distribution centers
- Refineries
Aesthetics are not an important factor in their design, but the internal infrastructure often needs to be customized for a specific purpose, for example, to accommodate assembly lines or large-scale machinery. Because of their purpose, industrial buildings’ working area is usually single-level and spread over a large expanse.
Commercial Buildings
The term “commercial” covers a range of activities, so properties include such diverse examples as:
- Gyms
- Hotels
- Hospitals
- Office blocks
- Restaurants
- Shops
They all have one thing in common: they are designed around people and services. As such, they need to be aesthetically pleasing in order to attract customers and clients, easily accessible and convenient in terms of parking facilities and proximity to transport routes and other amenities. They are built on relatively small lots and may be multistoried to maximize space.
Industrial Vs. Commercial: Leases And Tenants
The terms of leases vary considerably, to a large extent dependent on supply and demand.
Industrial Leases
These are typically for periods of five to twenty years. This is partly because of the tenant’s need for secure occupation and because there is often a significant investment in specialized machinery, equipment, and storage facilities to enable the company to produce. Relocation every few years would disrupt the entire operation.
Commercial Leases
Commercial leases tend to be short-term, between three and five years, except for anchor tenants, who may be given preferential terms to encourage their long-term commitment.
Because commercial tenants rent smaller areas in high-demand properties, their rental per square foot is invariably higher than the industrial tenant is charged and may, in the case of retail outlets, they may have a turnover clause, which involves paying a premium based on turnover in addition to a base rental.
Industrial Vs. Commercial – Zoning
Zoning regulations safeguard the city and its population from uncontrolled buildings and developments impacting traffic flow, public safety, and real estate values.
Industrial Zoning
Regulations will be concerned with the types of business being conducted in terms of the environmental impact, the dangers, for example, of chemicals polluting the air or the drainage system, and the transportation of dangerous materials in and out of the area. For these and other reasons, industrial real estate is located in zones away from residential and commercial spaces.
Commercial Zoning
Zoning of commercial real estate takes into account the fact that commercial buildings are people-oriented, and their success is linked directly to how much traffic they generate. Zoning regulations will take this into account, often with strict safety requirements, rules regarding adequate parking facilities, access to and from the roads, and noise control.
Industrial Vs. Commercial – Market Forces
Both industrial and commercial property are exceptional long-term investments, but the respective returns they offer investors are affected by numerous market forces.
Industrial Real Estate
Industrial property is affected by macro-economic forces to a greater extent than commercial property, as sectors such as manufacturing and processing of raw materials are the first to feel the effects of a regional or global recession. This is the risk involved in investing in industrial real estate, and it cannot be easily predicted – it depends entirely on how strong the tenant is and whether his business remains intact.
However, the fact that industrial property is less affected by local economic trends makes it a more secure long-term investment. There is a steady increase in demand for warehousing, storage, and distribution facilities that the growth of e-commerce has positively affected. With leases being much longer than those for commercial real estate, investors have greater security as well as a higher return.
Commercial Real Estate
It offers an investor more flexibility, whether retail space, offices, shopping malls, hotels, or a mix of the many types of commercial space. This product diversity means that the investor can spread the risk of a particular sector declining.
Still, it also can mean an increased chance that not all tenants in a commercial property will succeed. Commercial leases tend to be short but offer higher returns than residential property, so the reward balances the risk.
The downside of commercial property is that it can be affected by local factors – the re-routing of an access road, the building of a rival property nearby, as negatives, or the development of a new residential area close by as a positive market force.
Conclusion
However one defines it, both industrial and commercial property offer investors an opportunity to earn substantial returns, and both are worth including in any portfolio. While there is no definitive answer to which is the better form of real estate, we’ve unveiled the key differences so that you can make a more informed decision. Good luck with your investment.