Guide to Types of Commercial Real Estate
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The high growth rate of commercial real estate has made it a profitable venture for investors. To invest in commercial real estate, it's helpful to understand the types of commercial real estate so you can identify the properties you'd like to consider. In this article, we will look at what commercial real estate is, what you can do with it, types of commercial real estate and the best tips for choosing between different commercial real estate opportunities.
What is commercial real estate?
Commercial real estate is any property used for business activity. It includes:
Multi-unit residential properties
Hotels and resorts
Mixed use and special purpose properties
What can you do with commercial real estate?
There are several things you can do with commercial property to ensure you have a steady income flow:
There are two types of investment in commercial real estate:
Direct investment: Direct investment is physical property ownership. Generally, the most profitable properties are in areas with low commercial real estate and high demand, which makes for favorable rental rates. The strength of an area's local economy can also affect the commercial real estate purchase's value.
Indirect investment: Investors can also indirectly invest in the commercial market through securities such as exchange-traded funds and real estate investment trusts. Another option is investing in firms that serve the commercial real estate market, such as realtors or banks.
The most common way to profit from commercial real estate is to rent units to tenants. Depending on the type of property, you may acquire residential or commercial tenants. For the latter option, you rent out offices, shops and other establishments targeting customers.
Related: What is a Real Estate Broker?
You can also profit from a commercial property through its sale. In this situation, you buy a property and wait for it to appreciate, selling it off at a profit. You can also add value to your existing property to diversify your target market and enhance your profit margin. For example, you may acquire a house, furnish it, then put it on the market. Additional facilities and amenities will increase the property's value, hence the higher profit.
Read more: Learn About Being a Realtor
If you own undeveloped land that you do not wish to build on yet, you can lease out the space for parking or construction of temporary structures. You can then charge for parking fees and lease of the undeveloped space.
Types of commercial real estate
Various commercial real estate properties serve different functions. Here are the different types and how they work:
Office spaces often include conference rooms, cubicles or reception areas. Many companies do not want to move their entire workforce from place to place often, making it common for the office lease to be long term.
Office buildings fall into four different groups:
Class A office: These buildings normally have luxurious lobbies, high ceilings and extensive amenities. Many metropolitan office spaces fit into this category. This property typically has a higher rental fee.
Class B office: These are buildings with an average office space. Although they may not have extensive amenities, they are still functional facilities. You often find class B offices in the suburbs, which may have older buildings than class A.
Class C office: This is the lowest rank of office buildings. These spaces are at least 20 years old and may have outdated infrastructure.
Medical office: Medical offices are suitable for medical practitioners such as doctors, dentists and pharmacists. They are spacious and partitioned into various treatment rooms. These offices need advanced disposal systems to safely handle medical waste.
The retail category includes single store fronts and large shopping areas. The retail building is typically more costly per square foot compared to office space. Most commercial retail leases are long term and range between five to 10 years.
Multi-unit residential properties
This property category include apartments, townhomes, co-operatives and condos. Multi-unit residential properties exist in urban and suburban areas and fall into four main categories:
High-rise: A property with nine or more floors and at least one elevator
Mid-rise: A tower with an elevator, normally in urban areas
Walk-up: A building of four to six floors with no elevator
Garden style: A building of up to three stories
Large industrial properties help with the transportation of goods and services. Some activities that take place at these properties include assembling products, conducting research and operating heavy machinery. Here are the common categories of industrial real estate:
H**eavy manufacturing:** These facilities are heavily staffed and house machinery needed to manufacture goods.
Bulk warehouse: These large properties are normally make ideal product distribution centers.
Light assembly: These properties usually have fewer laborers, and owners can use them for product storage or small scale assembly.
Flex industrial: These facilities contain a combination of both office space and industrial space.
Hotels and resorts
Hotels and resorts offer meals, accommodation, entertainment and other services to travelers. Hotels and resorts may be independent or part of a major chain. There are six different categories of hotels:
Minimal service: Doesn't have concierge or room service
Full service: Has an on-site restaurant and includes room service
Casino: Has a gaming facility as well as lodging options
Boutique: Has full service amenities and it is normally located in urban areas
Resort: Offers full service amenities and often has an attached water park, amusement park or golf course facility
Extended stay: Has minimal service with full furnished kitchens to accommodate longer visits
There are three classifications for commercial land properties:
Agricultural land: Undeveloped space that could become a pasture or farm
Infill land: Exists in a developed area that is being resold, usually as part of real estate development
Brownfield land: Parcels of land previously used for commercial or industrial purposes but are now available for re-use
Mixed use property
Mixed-use property can be a combination of any types of commercial property, such as resort and retail properties.
Special purpose property
Special purpose real estate is any commercial real estate that doesn't fall into the categories listed above. It may include locations like:
Sports or entertainment arenas
Tips for choosing types of commercial real estate
When choosing to invest in commercial real estate, here are best practices to consider:
Be strategic about networking
The more investors you know, the more opportunities you have. Networking with professionals in the industry can help you identify quality investments that will yield high returns.
Look for an investment firm or boutique developer
If you'd like to invest in a smaller property, investment firms and boutique developers have a unique approach to commercial real estate that differs from large chains. They may be able to help you identify local opportunities that suit your interests and budget.
Get a mentor or partner
A good way to learn about commercial real estate investment is from an experienced investor. Working with a mentor or partner grants you another point of view to consider as you evaluate properties and make strategic decisions.
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