Commercial Real Estate Property: 6 Types
Commercial real estate is the foundation of a successful career in commercial property. You need to know the definition, the types of properties, and why commercial realty might be an alternative investment option for residential realty.
What is commercial real property?
Commercial real estate can be defined as a property with the potential to generate income, either through capital gains or rental income. Commercial property can be office buildings, duplexes or restaurants. Commercial property is defined as any space that can generate income by renting it out, or holding and reselling.
What is the difference between commercial and residential real estate?
Commercial property is distinct from residential real estate in four important ways.
Purpose : Commercial real estate, with the exception of residential rentals like apartment buildings, is typically used as a business location, and not a residence. Commercial spaces are designed to be workspaces for investors and owners.
Pricing: Commercial properties are more expensive because they are larger buildings located on large plots of land, in high-traffic commercial areas. They are more likely to belong to a group than an individual, as commercial properties are usually more expensive.
Occupants : A residential property is usually owned by the owner, while commercial properties are typically leased to business tenants.
Lease Terms: Commercial properties have typically longer lease terms, with office and retail spaces averaging five to ten years. Residential apartments are usually leased from six months to one year.
What is the difference between investing in residential and commercial property?
Commercial property can require a greater upfront investment, but the return on that investment is usually higher. However, you also may be at a higher level of risk, particularly if your retail or industrial tenant has a poor economic outlook. As a commercial property owner or investor you can benefit from triple net leases. These agreements place financial responsibility for real estate taxes and maintenance costs, insurance, etc., on the leasing tenant.
Commercial real estate is usually not a good investment for people who want to live there. The upside is you are usually dealing with business owners, rather than with renters. Rent is more reliable when income-producing companies are the tenants. Longer leases can provide a stable cash flow. Tenants like healthcare providers and government agencies can also offer stability in an uncertain economy.
On the other hand, investing in commercial properties can be more complex than residential property. Commercial investors usually have experience in commercial law, or a team of property experts to help them cut through all the red tape.
What types of commercial property are there?
The CRE sector includes everything from open land to industrial space, hotels, and even hotel rooms. It usually falls into one of six different categories.
1. Office
Urban or suburban office buildings can be classified into two categories. Urban office buildings can be found in large cities, and may include skyscrapers or high-rise buildings. Some of these properties are as big as several million square feet. Suburban office buildings tend to be smaller and are sometimes found in office parks.
Multi-tenanted office buildings are available, as well as single-tenanted ones. Many of these buildings are built-to-suit. Building Owners and Managers Association International describes.
Class A
Rents are above the average in the area for most prestigious office buildings. The buildings have high-quality finishes and state-of-the art systems. They are also accessible, well-maintained, and have a strong market presence.
Class B
Rents for office space are in the range of the average for the area. The building finishes are good to fair for the area. The building finishes and systems are good, but it does not compare to Class A buildings at the same price.
Class C
Buildings that are competing for tenants who require functional space and rents lower than the average in the area. This sub-sector includes medical office buildings.
Find out more about the class 3 office building classes.
2. Buy it Now
Retail is the term used to describe the spaces where we find the shops and restaurants that we visit. Multi-tenant buildings (often with a lead tenant or anchor tenant that drives traffic to the leased building) and standalone, single-use buildings are both possible.
The retail industry is complex, since the type and size of shopping centers are determined by many factors, such as the concept, the types of tenants and the number of trade areas.
Big-box centers are single-tenant structures (usually a national retailer like Target, Walmart or Dick’s Sporting Goods), or pad sites, which are usually a bank, a restaurant or a drugstore.
Find out more about the eight types of retail property.
3. Industrial
The majority of industrial buildings are located outside urban areas and along major transport routes. They accommodate various industrial operations. Low-rise buildings are also grouped together into industrial parks. Four types of properties can be identified:
Heavy Manufacturing These buildings are highly customized and contain machinery that manufacturers need to produce and operate goods and services.
Light Assembly: These can be used to store or assemble products.
Bulk Warehouse: These properties, which are often large and used as distribution centers, are classified as bulk warehouses.
Flex Industrial : These properties are a mixture of industrial and office space.
Remember that industrial land uses have their own set of zoning regulations. For example, research and development (R&D), facilities are subject to a specific type of industrial zoning.
Find out more about the eight types of industrial property.
4. Multifamily
Commercial real estate is classified when there are five or more residential units that belong to a single owner. Multifamily real estate includes all residential properties other than single-family homes, such as apartments, condominiums, co-ops and townhomes. Multifamily properties are often classified in the same way as office buildings: Class A, B, and C.
Apartment buildings are divided into different types of property. Freddie Mac divided them into 6 different buckets.
Highrise A building with at least nine floors and an elevator.
Midrise A multistory building that has an elevator. Typically located in urban areas.
Garden style A one, two, or three story apartment building built in a garden setting, in a rural, suburban, or urban area; the buildings may or not have elevators
Walk up: A building of four to six stories without an elevator.
Manufactured Housing Community: A housing community where the operator leases land to manufactured home owners.
Housing for special purposes: Multifamily properties of any style, which target a specific population segment. This includes student housing, seniors’ housing, or housing subsidized by the government (low income, or housing with special needs).
5. The Hotel
The hotel industry includes establishments that provide accommodations, meals and other services to travelers and tourists. Hotels can be flagged or independent. The latter is a part of a large hotel chain such as Marriott or Sheraton. Real Capital Analytics divides them into 6 separate categories.
Limited service: Doesn’t have room service, onsite restaurant or concierge.
Full service: Includes on-site dining and room service.
Boutique : A boutique is located in a resort or urban area, offers full service amenities, does not belong to a national franchise, and has less rooms.
Casino : Has gaming components, such as slot machines or video poker.
Extended stay: Limited service with fully equipped kitchens and larger rooms in the guest rooms for long-stays.
Resort : A large resort with full-service and a lot of land (such as Hawaii, Orlando, etc.) that has a golf course, sand beach, water park or other amusement facilities.
6. Special Purpose
Investors in commercial real estate can own special purpose property, which does not fall under any of the above sectors. Special-purpose facilities include, for example, land used to host fairs, amusement park, churches, Self-Storage and bowling lanes.
How can I get into the commercial real estate business?
You should first know the different types investment opportunities available if you want to diversify your portfolio through commercial real estate.
Direct Investment: Direct investments are the easiest way to invest in real estate, if you have a lot of money and a lot of knowledge. Direct investment involves working with a broker or real estate agent to locate a property. You can then choose to manage the property yourself or hire an outside property manager.
Direct investment: Even if you don’t have a lot of cash or aren’t CRE-savvy you can still invest in commercial property through indirect investments. You can invest in commercial real estate through REITs and crowdfunding. ETFs are also an option. You can buy stock in a commercial property company instead of buying the property. You can become a limited partnership and receive a share of the returns on your investment without being involved in the day-to-day operations or decisions of commercial properties.
Types and types of indirect commercial property investment
Real Estate Investment Trusts (REITs): Reits are companies which buy commercial real estate and lease them to tenants. REITs offer shares to qualified investors, such as mutual fund managers or other professional investors. Then they distribute 90% of the profits to those investors in dividends. REIT investment offers greater liquidity because REIT shares can be easily purchased and sold.
Commercial Real Estate Crowdfunding is similar to traditional crowdfunding. A group of people can pool their funds together to fund a large project such as the purchase of commercial property. Crowdfunding is less expensive than other forms of CRE investment, but investors are required to be accredited by Securities Exchange Commission.
Exchange-Traded Funds (ETFs). An ETF is similar to a mutual funds, but its value can change more often than that of a mutual funds. A REIT ETF is a fund that consists of REIT securities, rather than stocks. It has lower overhead costs because it doesn’t trade the securities individually.