Commercial real estate industry - Business in United States of America
Definition: All privately owned nonresidential and agricultural real estate that is used for profitmaking enterprises; includes such diverse property as apartment buildings, office buildings, industrial properties, medical centers, hotels, malls, and retail stores.
Significance: As economic activity has grown more complex over time, commercial real estate has developed as a separate category from residential real estate. Although the numbers of commercial real estate properties are much smaller than those of residential properties, the total dollar value of commercial real estate property constitutes a substantial portion of the total real estate value in the United States.
Native Americans had only residential real estate, if their generally primitive housing can be described in such sophisticated terms. Early colonial real estate was residential in the sense that homes were built on agricultural land. When commercial or manufacturing structures were built, they usually included the residences of their owners. Inns and taverns included residential quarters for their owners, and store owners typically lived on the second floor above their businesses. As economic activity became more complex, a separation between residences and commercial property developed, primarily in urban areas.
By the nineteenth century, urban areas were already divided into commercial, manufacturing, and residential sections. By the twentieth century, these informal subdivisions were made permanent through zoning laws, which distinguished between various grades of manufacturing and commerce in several grades of commercial properties. Eventually even residential property zoning was used to indicate where high-density residences such as apartment houses could be located, in part to protect the owners of single-family housing from the traffic associated with such large developments.
The purchase and sale of commercial real estate are typically handled by specialized real estate agents who may work at firms specializing in commercial properties. By the twenty-first century, very complex real estate investment trusts with highly leveraged debt service were developed to handle the largest real estate projects.
Although all developed real estate parcels have certain fixed or hard costs, such as roads, sidewalks, lighting, utility lines, and sewers, commercial real estate typically requires much larger amounts of capital than that needed for residential real estate. This capital is typically raised through issuing stock or borrowing large amounts of money, frequently through the issuance of bonds. Financing for nearly all commercial real estate is so complex that separate divisions within commercial and investment banks are devoted solely to commercial operations.
Manufacturing installations can be so large and complex that zoning ordinances do not adequately cover them, and a separate regulatory regime has been created to deal with the environmental, transportation, communication, and utility aspects of their construction and operation.
Commercial and manufacturing real estate properties are generally so valuable that special assessments are imposed on them by local governments, and they can provide a substantial source of income for local governments, whether directly through taxes or indirectly through the added employment opportunities and business activity they bring to the community. So attractive are the business developments that local and state governments have shifted from taxing these properties heavily to offering tax forgiveness and exemption programs to encourage commercial real estate development in the hopes of adding jobs to their communities. Local governments then hope to cover the cost of infrastructure developments by gaining real estate tax revenue from the associated residential housing.
Shavell, Steven. Foundations of Economic Analysis of Law. Cambridge, Mass.: Harvard University Press, 2004.
Stoebuck, W. B., and Dale A. Whitman. The Law of Property. 3d ed. St. Paul, Minn.: West Group, 2000.
Waldron, Jeremy. The Right to Private Property. New York: Oxford University Press, 1988.
See also: U.S. Department of Housing and Urban Development; Retail trade industry; Small Business Administration; Supreme Court and land law; Donald Trump; commercial zoning.
Construction industry: Buildings and Infrastructure
Bankruptcy law: Real Estate in Bankruptcy
US Department of Housing and Urban Development (HUD)