Commercial Real Estate Definition: Commercial real estate refers to non-residential property (land and buildings) used by companies to support business activities; the owners of these properties generate income by charging the companies rent to use this space.
The main categories include office buildings, retail properties such as shopping malls, industrial complexes such as warehouses, hotels, and apartment complexes or “multifamily” properties.
Commercial real estate does NOT include single-family owned homes or condominiums (condos) because those properties are used for residential (living) purposes rather than business purposes.
Apartment complexes (“multifamily properties”) are an exception to this rule; they are considered “commercial” because they are owned by investors and rented out to individuals (rather than being owned by individuals).
The commercial real estate employment landscape is extremely diverse. Jobs are divided into several major categories that include acquisitions, development, lending, brokerage and other areas such as appraisal.
Many companies offer real estate positions including brokerage firms, real estate investment firms, investment banks, private equity firms, and specialized firms such as Real Estate Investment Trusts (REITs).
Real Estate Acquisitions refers to purchasing existing properties, operating them, and then reselling them to others; there may also be elements of renovations/improvements.
Acquisitions roles tend to be deal/office-based that don’t require a heavy on-the-ground presence. They also tend to pay well due to the reliability of income streams from existing properties.
Development refers to construction and brick-and-mortar jobs, which have much more variable outcomes and tend to pay less; more of a physical job and less of a desk job / knowledge worker activity.
Real estate brokerage is a job where agents connect buyers and sellers and earn a commission on the sale of properties. In that sense, it’s very similar to investment banking, but on a much smaller scale for properties rather than entire companies.
There are many paths that real estate professionals follow in order to break in, but there are a few common threads:
Almost all property acquisitions and developments are funded with a combination of debt and equity, so lending is extremely important; done by a combination of traditional large banks, government entities, dedicated lenders and debt funds, and alternative investment managers.
Real estate investment trusts (REITs) raise debt and equity continuously in the public markets and then acquire, develop, operate, and sell properties.
REITs must comply with strict requirements about the percentage of real estate-related assets they own, the percentage of net income they distribute in the form of dividends, and the percentage of their revenue that comes from real estate sources.
In exchange for that, they receive favorable tax treatment, such as no corporate income taxes in many countries.
Real estate operating companies (REOCs) are similar, but they do not face the same restrictions and requirements and do not receive the same tax benefits.
Real Estate Investment Banking refers to the groups at investment banks that advise real estate, gaming, and lodging companies on M&A deals and capital markets activities.
This is different from brokerage and development/acquisitions groups because REIB focuses on entire companies, not individual properties.
Bankers in these groups do need to know something about individual properties, but the financial modeling and technical analysis differ substantially because most of it is done at the corporate level, not the asset level.
Real estate private equity (REPE) firms raise capital from outside investors, called Limited Partners (LPs), and then use this capital to acquire and develop properties, operate and improve them, and then sell them to realize a return on their investment.
REPE firms differ from REITs in that they are not raising equity and debt constantly and distributing dividends to their investors. Instead, they raise capital once, deploy it over time, and then eventually return it to their investors and then raise a new fund.
Real estate professionals are responsible for a host of analytical tasks, including technical and market analysis, as well as preparation of investment documentation and memos. There may also be a hands-on element to the role (e.g. inspecting properties and building sites).
Commercial real estate market analysis is the process of generating reasonable assumptions for use in financial models and to ensure that the qualitative aspects of the market and property meet your requirements as an investor.
Techniques used in market analysis include:
With real estate financial modeling (REFM), you analyze a property from the perspective of an Equity Investor (owner) or Debt Investor (lender) in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns.
There are three major categories of real estate financial models:
The real estate pro-forma is a key part of any real estate analyst’s toolkit. You can think of the pro-forma as a combined and simplified Income Statement and Cash Flow Statement – for a property rather than a company.
Real estate investment strategies for individual properties are organized into several broad categories, which include:
You can see the risk and potential returns of these strategies below (“Core Plus” would be just to the right of “Core Real Estate”):
As with most other finance sub-industries, real estate is a competitive field where companies expect new hires to be able to hit the ground running and add value immediately.
But the difference is that unlike in investment banking and private equity, where your pedigree (university or business school, GPA, brand-name internships, etc.) counts for a lot, real estate is mostly about your hustle and your results.
If you can network aggressively and prove yourself capable, you don’t need to go to Harvard or Oxford to win internships or job offers.
But this also means that it’s critical to learn the skills independently so you can get noticed, get hired, and get promoted.
Real estate-specific knowledge is important, of course, but as in any other finance role, you also need to know Excel, accounting, and valuation fundamentals (e.g., how to build a simple DCF).
For commercial real estate (CRE) roles, we recommend the following courses offered by Breaking Into Wall Street (BIWS):