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March 2024

The Different Types of Commercial Real Estate

Unlike residential real estate, which is designed for people to live in, commercial property is used to make money. A lemonade stand in your driveway would be a form of commercial real estate, like a warehouse or apartment building. For more information, you can visit Goldstream Land Group to proceed or inquire.

Some commercial properties are specialized and may have a single use, such as a retail shipping center or a hotel. Others are mixed-use, combining two or more property types, such as an apartment complex with a grocery store.

As with any asset class, numerous property types make up commercial real estate. Each property type offers different levels of risk and return potential. Investors develop operational advantages and market expertise by specializing in one or more.

Land in commercial real estate includes any plot of land used for business purposes. This has retail shops, warehouses, parking lots, and even profit-generating residences. The commercial designation for a property depends on municipal zoning regulations and can vary by area. Changing a property’s designation can be challenging, requiring extensive documentation and approval from local authorities.

A business that occupies a space in a commercial building must balance maximizing rents and minimizing turnover, which can be expensive. Fortunately, investors can use data-driven investment strategies to mitigate some of the challenges associated with CRE.

Investing in land requires a high level of patience because it’s impossible to know how long it will take for the property to appreciate. Unlike residential real estate, which generally appreciates steadily, commercial land value can fluctuate based on supply and demand and the specific characteristics of a particular property.

The most common types of commercial real estate are offices, retail and industrial. Office buildings are leased out to businesses as their headquarters, while retail structures like shopping malls or department stores sell goods to the public. Industrial buildings are warehouses, manufacturing plants, or other structures that house a business’s machinery and equipment. Multifamily buildings that contain five or more rental units are considered apartments, and high-rise residential properties are typically 12 stories or higher.

Office. Almost every organization needs real estate, from restaurants to manufacturing companies to healthcare practices. Some entities, like universities and hospitals, buy their property outright, but most lease facilities. Those leases generate income for the owners and help businesses avoid tying up significant cash.

Office buildings are a major asset class in commercial real estate. They can be whole buildings, floor sections, or office parks. Various factors affect the market value of offices, including location (e.g., a central business district or suburban location), square footage measurement standards, and the amount of available sunlight and open space.

Industrial space is any building used for industry, such as light manufacturing, bulk warehouses, or flex spaces that combine industrial and office space. It is a less risky investment than office properties, but it has challenges with supply and demand, labor costs, and changing operational models.

Retail properties include any building that sells products and services, from a single storefront to malls and shopping centers. Online sales have caused some retailers to struggle, but these spaces still play an important role in new ways.

Multifamily buildings are residential properties with five or more units, such as apartment complexes and townhome communities. They are a great first investment for individuals who want to avoid committing to a single-family home.

Specialty buildings can be built for specific uses or adapted to serve multiple tenants, such as self-storage and medical offices. They attract a premium in the marketplace because they can be marketed as an ideal space for certain businesses. However, these buildings often require specialized expertise to maintain.

The retail category in commercial real estate includes properties used to market and sell consumer goods and services. This property type has various configurations to meet consumers’ shopping preferences, ranging from regional malls with food and clothing anchor tenants to small neighborhood shopping centers. The majority of the retail sector comprises single-tenant buildings with large glass windows that display products and mannequins to draw in shoppers.

Warehouses are another form of commercial real estate typically occupied long-term by businesses such as retailers or wholesalers who need storage for their inventory. A company may also choose to use a warehouse for distribution purposes. In this case, the warehouse acts as a central hub from which other distribution points will pull inventory for distribution to various store locations in different markets.

Hotel property is another common commercial real estate type that can be an excellent source of income. Investors can invest in this property directly or by working with a broker or agent to find a good deal on a hotel that they can then manage themselves or hire a management team to do the work for them. The key to investing successfully in hotel property is understanding the local market and what it demands.

Commercial property owners usually lease their spaces rather than buy them outright, and they are looking for a stable return on their investment. This stability can be achieved with the help of long-term leases that provide income from rent payments, and it is also possible to find tenants who can pay even in a slow economy.

Generally considered a “heavy-duty” category of commercial real estate, industrial properties include warehouses, distribution centers, outdoor storage facilities, and truck yards. Industrial is gaining popularity as a CRE sector in light of explosive e-commerce growth and renewed interest from companies to reshoring production back for supply chain resiliency.

Unlike retail and office spaces, where tenants are consumers, most industrial business businesses generate income from other business customers (B2B). As a result, these revenue-generating businesses tend to be more stable and offer long-term leases with fixed rent rates. This stability can give investors a sense of security even in an unstable economy.

The industrial industry consists of various buildings, and these facilities can be quite different. According to Gordon Code, the director of the industrial sector at Colliers International, these buildings can be broken down into several categories, including food-grade manufacturing, engineering and fabrication, transport and third-party logistics (3PL), and distribution warehouses.

Many companies use their distribution warehouses as fulfillment centers, shipping products directly to consumers in metropolitan areas. This has helped to increase demand for these facilities. Additionally, companies like Amazon can ship their product to consumers within hours because of nationwide distribution warehouses.

Flex properties are industrial properties that can be used in various ways by different tenants. These spaces can accommodate everything from distribution to research and development. Typically, there is a 70:30 ratio of warehouse-to-office space in these properties. This allows tenants to adapt the space to fit their needs without paying for a redesign every time their company grows or shrinks.

Regarding commercial real estate, multifamily is a specific property type that investors can target. It can range from a duplex up to large apartment buildings. When defining multifamily in CRE, Reonomy defines it as structures (or a collection of buildings) that contain five or more living units for rent.

Investing in multifamily properties offers investors the chance to capitalize on the demand for housing, with tenants typically paying for their rent and utilities. While the perks of multifamily investment are considerable, the sector has risks. For one, high vacancy rates can result in negative cash flow for the investor. Additionally, tenant turnover can be difficult and costly, especially in competitive rental markets.

The most common multifamily buildings are apartments, ranging from a single-story walk-up to a high-rise building with hundreds of units. These structures are often found in large cities and dense urban neighborhoods. Those looking to buy class A multifamily investments should seek properties in primary markets with good access to jobs, universities, and other attractions.

It’s important to distinguish multifamily from other residential rental property types, such as single-family homes, condominiums, and townhomes. Investing in these properties can be done with a residential mortgage, which offers lower down payment requirements. However, those seeking to diversify their portfolio with a multifamily investment must work with a commercial Realtor to maximize their opportunities. This will ensure that they can leverage their unique expertise and market insights when negotiating terms for their purchase. As a result, they’ll be able to secure a more attractive deal on their next multifamily property purchase.