Top Types of Commercial Real Estate

The Eight Top Types of Commercial Real Estate

You’re no doubt familiar with the concept of ‘commercial real estate’ and understand that, generally speaking, CRE refers to property that is used for generating income in some way. These top types of commercial real estate properties are governed by zoning laws and regulations and are most commonly owned by investors who rent the property out. There are eight different types of commercial real estate and each comes with its own set of things to be aware of including risks, quirks and various subtypes.

So what property types are classified as CRE?

1. Retail Properties

Retail properties are properties that contain space leased to businesses that sell goods or services directly to consumers. Retail properties make great investments because of their high visibility and the fact that their tenants usually sign up for long-term leases. Of course, this asset class isn’t risk-free with traffic levels closely tied to macroeconomic factors and levels of consumer discretionary income.

The three retail subtypes to be aware of include:

• General purpose shopping centers – where shoppers can go to purchase general items including food, electronics and clothing

• Power centers – usually large scales premises with three or more anchor tenants, particularly those in home improvement or warehouse club stores

• Community retail centers – typically smaller than a power center, arranged in a L or U shape strip mall format, and designed to meet the needs of the local community.

2. Offices

Offices are properties in the top types of commercial real estate that contain spaces leased to companies who use the space to operate their business. This includes both generalist offices for purposes like accounting or finance, as well as specialized purposes such as dental offices and research labs.

Office buildings come in four classes which are given a letter grade from A to D. Class A offices are the highest-end offices with luxury fit-outs in the best locations. Accordingly, they attract the highest rental rates. Class D properties are in the poorest locations and conditions, with some even needing a complete renovation, rehabilitation or demolition. Class B and C offices sit in between Class A and Class D.

It is also important to note the difference between offices located in Central Business Districts and Suburban Offices. Office buildings are often clustered in the CBDs of cities, with numerous skyscrapers in large cities like New York and Chicago. In the suburbs, you may be likely to find office complexes that include more than one building as well as external amenities such as courtyards and gardens. This can be a cost-effective way for larger companies to house large numbers of employees.

Office buildings can be a very lucrative CRE investment with low risks thanks to the possibility of long-term tenancies, as well as income diversity due to multiple income streams due to their capacity to house multiple tenants.

3. Multifamily

Multifamily properties are properties containing multiple residences that are leased to individuals and generate income for the property owner. This is the one CRE category that is leased to individuals, rather than businesses. Multifamily properties typically have two or more residential dwellings within the same building or complex.

Multifamily subtypes to note include:

• Duplex, triplex and quadplex properties, which are two, three or four homes joined together.

• Garden apartments, consist of four or more units that each have access to a lawn or garden area. Most commonly found in suburban or rural areas, these can be in one building or multiple buildings and are usually one to three stories tall.

• Mid-rise apartments are buildings that have between five and twelve stories. They are usually found in urban in-fill areas.

• High-rise apartments, are buildings consisting of twelve stories or more. These multifamily properties are most often found in dense urban areas such as major cities. Because high-rise buildings can contain over 100 units, they are professionally managed.

Other types of multifamily properties include student housing and senior and assisted living properties.

Like office buildings, multifamily properties can also be subdivided into Class A, B and C properties based on factors such as their location and condition.

4. Industrial

Industrial buildings are a class of properties with an industrial purpose, such as manufacturing, distribution, and/or logistics. Typically located along interstate highways, industrial CRE attract long-term leases and long-term returns with low overhead costs and therefore are an enticing investment. As ecommerce continues to boom, industrial warehouses remain in high demand.

The categories of industrial properties are:

• Light assembly, which is typically smaller in size. Examples of light assembly properties include storage facilities and final product assembly plants.

• Flex warehouses, are designed to be flexible and usually contain a combination of warehouse and office spaces or display areas.

• Bulk warehouses, are vast warehouses that are at least 50,000 square feet. Typically, they are used by large companies as a central distribution point between all their stores and require easy access by trucks.

• Heavy manufacturing, which are buildings that generally require significant transformations to accommodate the manufacturer’s specific machinery and processes. Accordingly, they require a lot of work to get ready for subsequent tenants.

Hotels and Hospitality Properties

Hotels and hospitality properties are properties that rent space to individuals on a nightly basis for both business and leisure-related travel.

The three types of hotels to be aware of, are:

• Full-service hotels, have a number of a facilities in order to provide various services to guests. This includes restaurants, room service, fitness centers, business centers, spas and swimming pools.

• Limited-service hotels, which, unlike a full-service hotel, have a narrower range of services on offer, such as a grab-and-go market instead of a hotel, or a room with only a few pieces of gym equipment instead of a complete fitness center.

• Extended stay hotels, are hotels catered for people who want to stay longer than a typical stay of a few days. These hotels offer amenities such as kitchenettes and larger rooms.

• Resort, which offers full-service facilities along with an added entertainment element such as a beach or amusement park.

Land

The definition of land as a CRE asset is land that does not have a building built on top of it. This is considered one of the riskiest types of commercial real estate to invest in, but the risks can pay off with the highest returns. Generating revenue on undeveloped land is completely up to the investor.

The three sub types of this asset class include:

• Greenfield or agricultural land, which is land used for agricultural purposes including farming. Ranches, orchards and animal farms also fall into this category. Usually agricultural land is found in rural areas where land is much cheaper.

• Infill land, which is vacant land in an urban area, awaiting development.

• Brownfield land, is land that was once used for an industrial or commercial purpose but is now available for re-use. Brownfield land usually has some kind of environmental impairment, such as contaminated groundwater. This kind of land can be purchased cheaply due to the cost in rectifying its issues.

Mixed-Use

The mixed-use category covers property containing at least two different property types, such as a multifamily apartment building that sits on top of a shopping center.

Mixed-use properties are very common in suburban areas where residents want to be able to shop, work and live all within walking distance.

Special Purpose

The special purpose category in the top types of commercial real estate encompasses any building built for a specific purpose that may not fall into the other categories listed above. Special purpose properties are generally harder to value, since comparable properties are scarce or non-existent. Examples of special-purpose CRE includes sports stadiums, theme parks, bowling alleys and movie theaters, zoos, schools, student housing, churches, parking lots and self-storage.

Choosing which type of commercial real estate to invest in depends entirely on you and your investment strategy be it a commercial rehab loan or cash out refinance. At Alpha Funding, as a commercial bridge loan lender we can help you with tailored loans designed to deliver the best results based on your goals and the property you are purchasing. Get in touch now.