Commercial real estate (CRE) is vital in driving the economy forward. It includes properties used for business purposes and income generation. Understanding the different types of CRE helps make informed decisions in investments. CRE affects employment, infrastructure development, and community growth in significant ways.
This article will explore the six most common types of commercial real estate. Each type serves unique purposes and caters to specific economic needs. Knowing their differences enhances success in the CRE sector.
What is commercial real estate?
Any property utilized to make money counts as commercial real estate. Office buildings, restaurants, warehouses, and even duplexes for homes are included. These assets can be rented or kept for future sale to generate revenue. Capital gains or rental income define the value of commercial real estate.
Businesses often utilize these spaces to operate, grow, and develop. If a property helps produce income, it is classified as commercial real estate. This type of property plays a significant role in economic activity and growth. Retail businesses, hotels, and tenant-rented residential complexes are basic examples.
How is commercial real estate different from residential property?
Residential properties and commercial real estate (CRE) have different uses, differ in cost, and have different lease terms. Let’s analyze their four primary distinctions.
1. Purpose
The main distinction is in the goal. Instead of being used as a living, commercial real estate is utilized for business purposes. For instance, businesses are the intended users of office buildings, shops, and industrial sites. On the other hand, residential properties, such as homes, apartments, or condos, are made for habitation by people.
2. Price
Generally speaking, commercial properties are far more costly than residential ones. This is because they are bigger, located on larger land parcels, and are frequently found in crowded business districts. These properties are typically held by groups of investors rather than individuals because they demand a more significant investment. On the other hand, residential properties are less costly and more minor.
3. Occupants
Another difference is who owns the property. Most residential properties are owned by their owners or rented to families or individuals. Tenants in commercial real estate are typically businesses that rent the premises. While individuals utilize their homes for personal life, these businesses exploit the property to make money.
4. Lease Terms
In addition, leases differ. Leases for commercial properties are usually longer than those for residential ones. Leases for offices and stores often run for five to ten years. Residential leases, on the other hand, often last six months to a year. In commercial real estate, longer leases foster stability for businesses and investors.
Also Explore: How to Get into Commercial Real Estate: A Beginner’s Guide
How does investing in commercial property compare to investing in residential property?
Commercial real estate usually needs a more significant initial investment than residential real estate. On the other hand, commercial real estate often offers more immense potential advantages but involves a higher risk. Economic downturns may impact retail or industrial tenants, raising the risk of investments.
Using triple net leases is a significant benefit of commercial real estate. These leases shift expenses to the leased tenants, such as taxes, maintenance, and insurance. Unlike residential ones, you cannot dwell on your commercial investment property. The benefit is dealing with business owners instead of individual renters, creating a B2B relationship. Business tenants may be more reliable in paying rent and following lease terms.
Additionally, longer lease terms provide steady cash flow and lower tenant turnover. Tenants such as government offices and healthcare businesses add stability to tough economies. Compared to residential investing, commercial property management might be more complicated. To manage the intricacies of commercial real estate, investors frequently require legal or property specialists.
What are the different types of commercial real estate?
1. Office
Definition and Overview
An office building is a property used for business purposes, typically by companies or organizations. Office buildings come in different types and sizes, with more significant urban buildings often located in cities. Suburban office buildings are smaller and sometimes grouped in office parks. Single-tenant and multi-tenant office buildings are possible, and some have been built specifically to meet tenants’ demands. In addition, they are divided into three groups: Class A, Class B, and Class C.
Class A The most prestigious structures that compete for upscale tenants are office buildings. These structures have excellent construction and finishes and are located in desirable areas, often in large cities.
Modern systems, such as advanced heating, cooling, and security features, are installed. Class A buildings provide excellent accessibility, with easy parking and public transportation. Rent for these properties is usually above average for the area due to their prime location and high standards.
Class B While they are not as opulent as Class A buildings, office buildings are of good quality. Such buildings typically draw a broader spectrum of tenants and are more affordable.
Class B buildings often have acceptable to good finishes and systems, albeit they might not be as posh or advanced as Class A buildings. Rents for Class B office buildings are generally typical for the area, and small to mid-sized firms frequently select them.
Class C office buildings are functional but older and often lack modern amenities. These buildings typically have lower rents compared to Class A and B properties. They may not compete with higher-tier buildings regarding aesthetics, location, or systems.
However, they still serve businesses that need bare office space at an affordable price. Class C buildings often attract tenants looking for cost-effective space, such as medical offices or small businesses.
Key Features
Office buildings are defined by their location, size, and amenities. Urban office buildings, like skyscrapers, tend to be much larger, sometimes spanning millions of square feet. Suburban office buildings are more minor but may be part of office parks with several buildings. The key features of office buildings include high-quality finishes, modern systems, and accessibility. The three classifications help determine the building’s prestige, quality, and rent.
Pros and Cons
Benefits: Office buildings typically offer stable tenants and long-term leases, especially for Class A properties. These properties attract premium businesses and provide consistent income for investors.
Challenges: Office buildings can be sensitive to economic changes. During economic downturns, demand may decrease, leading to vacancies. Class C buildings may struggle to attract high-paying tenants due to their lower quality and functionality.
2. Retail Properties
Definition and Overview
Malls and shopping centers are examples of retail properties, which are areas used by restaurants and merchants. These assets may be single-use structures or multi-tenant buildings. An anchor tenant, such as a big store, is frequently found in multi-tenant buildings and draws customers to the building. Examples of single-tenant buildings are big-box retailers and independent pad sites, such as banks or eateries. Retail shops serve companies that sell goods or services to customers directly.
Key Features
Retail establishments are usually found in busy locations that are convenient for customers. These sites appeal to tenants and customers because they frequently offer enough parking and visibility. Because they showcase goods and draw customers in, storefronts are crucial for businesses selling them. The size, type of tenants, and surrounding trade area also define retail properties, impacting their appeal and success.
Pros and Cons
Benefits: Retail properties offer high visibility, which attracts consumers. They also benefit from strong consumer demand, especially in busy areas.
Challenges: E-commerce is becoming a more significant competitor for shops, which lowers foot traffic. Changes in the market, such as customers’ changing tastes, might affect retail places’ profit.
3. Industrial Properties
Definition and Overview
Industrial properties are buildings designed for industrial operations and are usually located outside urban areas. These properties serve a variety of tenants, such as manufacturers, distributors, and assembly plants. Industrial buildings are categorized into four types:
Heavy manufacturing, light assembly, bulk warehouses, and flex industrial. Heavy manufacturing buildings specialize in machinery and production. Light assembly buildings are used for product assembly or storage. Bulk warehouses are large spaces used for distribution, and flex industrial spaces combine industrial and office areas.
Key Features
Industrial properties are designed for large-scale operations, including logistics and storage. They are typically located near transportation routes for easy access to goods and services. These properties provide ample space for machinery, inventory, and operations. Flex industrial spaces may also offer office areas to accommodate administrative functions and industrial needs.
Pros and Cons
Benefits: Industrial properties often offer long-term leases and stable tenants, especially logistics. There is a strong demand for logistics and storage space due to growing e-commerce.
Challenges: Industrial properties face zoning restrictions, which can limit their use. Maintenance costs can also be high due to the specialized nature of these buildings.
4. Multifamily Properties
Definition and Overview
Multifamily properties are residential buildings with five or more units owned by a single entity. These properties cover a variety of residential real estate types beyond single-family homes, such as apartments, condos, co-ops, and townhomes. Like office buildings, multifamily properties are often classified into Class A, B, and C based on location, quality, and amenities.
Apartment rental buildings can be further divided into multiple property types. Freddie Mac has categorized them into six distinct buckets:
Types of Multifamily Properties
- High-rise: A building with nine or more floors and at least one elevator.
- Mid-rise: A multistory building with an elevator, typically found in urban areas.
- Garden-style: A one-, two-, or three-story apartment building situated in a garden-like setting, located in suburban, rural, or urban areas. These buildings may or may not have elevators.
- Walk-up: A four- to six-story building without an elevator.
- Manufactured housing community: A community where the operator leases ground sites to owners of manufactured homes.
- Special-purpose housing: A multifamily property that targets specific populations, such as student housing, senior housing, or subsidized (low-income or special needs) housing.
Key Features
Multifamily properties often have diverse tenant demographics, ranging from students to retirees, and provide steady rental income. They are usually located in areas with high demand for housing, whether in urban or suburban settings. Maintenance is crucial to keep the property functional, as both common areas and individual units require attention.
Pros and Cons
Benefits: Multifamily properties provide steady rental income and high demand for housing. They can offer consistent cash flow, especially in areas with a shortage of single-family homes.
Challenges: Managing multifamily properties can be complex due to tenant turnover and maintenance needs. The higher number of tenants and units requires efficient management and increased operational costs.
5. Hospitality Properties
Definition and Overview
Hospitality properties are commercial real estate used to provide accommodations and services to travelers. These properties include hotels, motels, and resorts catering to people seeking short-term stays. They can range from budget-friendly motels to luxurious resorts.
Types of Hospitality Properties
- Hotels: These buildings offer rooms for short-term stays, typically with various services and amenities.
- Motels: Budget-friendly accommodations, usually with rooms accessible from the parking lot.
- Resorts: Large properties offering a mix of accommodations and recreational services, often in scenic locations.
Key Features
Hospitality properties are focused on short-term rentals. They offer services like concierge, room service, and other amenities. These properties often include pools, gyms, restaurants, and event spaces to enhance guest experiences.
Pros and Cons
Benefits: Hospitality properties offer high returns and are in demand due to tourism. They can generate significant revenue, especially in popular tourist destinations.
Challenges: These properties face seasonality and high operating costs. They require ongoing maintenance and management, which can be costly.
6. Mixed-Use Properties
Definition and Overview
Mixed-use properties combine two or more real estate types, such as retail and residential. These properties are designed to serve multiple functions in one location, offering convenience for both residents and businesses.
Key Features
Mixed-use properties often feature multi-functional spaces, like apartments above stores. These properties integrate different design elements, ensuring the spaces work well together. For example, retail spaces are often on the ground floor, with residential units above.
Pros and Cons
Benefits: Mixed-use properties offer diversification, attracting various types of tenants. They create community-oriented spaces, making neighborhoods more vibrant and convenient.
Challenges: Managing mixed-use properties can be complex due to multiple tenant needs. Zoning regulations can also be a challenge when trying to develop these properties.
FAQs
What is the most profitable type of commercial real estate?
The most profitable type of commercial real estate often depends on location and market trends. However, multifamily properties, office buildings, and retail properties can provide steady income and good returns. Researching local demand is key to maximizing profits.
Which type of commercial property is best?
The best type of commercial property depends on your investment goals. Multifamily properties provide steady income. Retail and office spaces offer higher returns but may come with more risk. Consider factors like location, demand, and your financial capacity before investing.
What is the most popular type of real estate?
The most popular type of real estate is residential, but commercial real estate also has strong demand. Office buildings, retail spaces, and multifamily units are commonly sought-after. Demand varies by location and economic conditions, so market research is essential.
What are the four types of commercial real estate?
The four main types of commercial real estate are office, retail, industrial, and multifamily. Each type serves different needs, such as business operations, retail sales, manufacturing, or housing. Understanding the market and tenant demands can guide profitable investments in these sectors.
Conclusion
In conclusion, there are six main types of commercial real estate: office, retail, industrial, multifamily, hospitality, and mixed-use. Understanding each type helps investors make informed decisions. Consider your goals, market conditions, and resources before investing in commercial properties. Continually assess the risks and rewards carefully.
