COMMERCIAL SERIES: 8 Different Types of Commercial Real Estate for Investors

Have you ever heard people talk about real estate and they mention commercial real estate investors? Did you wonder what they meant? I remember the first time I heard commercial real estate and I thought of retail centers, apartment buildings, and industrial properties. I knew the word commercial is derived from the word commerce, so I figured trading or business. Well, I was not too far off since commercial real estate can be defined as real property that provides income from the allowable use of the property relating to a business purpose.

I am doing a series of blogs explaining each of the different categories of Commercial Real Estate. This first blog is a general overview and future blogs will provide a more in-depth analysis of each commercial property type and their characteristics as a commercial real estate investment.

LAND

The first commercial real estate type is where it begins – the LandThere are three main subcategories of land that include agricultural, rural land, brownfields, and in-fill landAgricultural land is considered commercial since it is used as a business to generate income. Rural land is undeveloped land that lies outside the urban growth area and is not designated as having long-term commercial applications. Brownfields are land that has been remediated of environmental contamination in the soil and is now approved for new commercial purposes. In the past, an industrial property may have had certain minerals, oils, and metals that made its way into the soil as regulations were not very stringent in comparison to recent years. Or certain industries, such as dry cleaners, would use chemicals that left the soil contaminated by today’s standards. Infill land is vacant, or previously developed land that is now vacant, and located in urban areas.

RETAIL

The retail category is comprised of property that offers various forms of selling from a business directly to the consumer. The largest is super-regional malls with large, big box retailers like Macy’s department stores and usually at least two other national anchor tenants, numerous smaller national retail stores such as WIlliams-Sonoma, and regional and local businesses in the retail sector. Overall, the typical size is 800,000+ square feet of gross leasable area with a wide variety of retailers. The regional mall is like a super-regional mall yet is smaller in scope and size. The regional mall is usually between 400,000 and 800,000 square feet.

A Community Center is also known as a Large Neighborhood Center with general merchandise ranging from various soft goods to electronics to drug stores. The size typically varies between 125,000 to 400,000 square feet and are laid out in a straight line, “L” or “U” configuration.

A Neighborhood Center is in neighborhoods, thus the name, and is all about convenience for residents in the area. These shopping centers are usually anchored by grocery stores that help drive traffic to the center. The average size is 30,000 to 125,000 square feet.

Strip Malls or Convenience Center is the most prevalent of retail buildings with over 70,000 locations around the US. These properties are in a desirable location and can have a mini mart that acts as an anchor while the other tenants over a narrow scope of merchandise or service.

There are many other special-purpose and limited-purpose centers, however, I have covered the major categories. There is one more type worth mentioning since they are quite popular. The Power Center is a special-purpose center that has major box retailers like Home Depot, Costco, and Best Buy. There are a few smaller tenants, however, the large national firms take a majority of the 250,000 to 400,000 square footage.

OFFICE SPACE

Office buildings can be defined into three subcategories, based on the amenities and location. Class A buildings are the most coveted designation with high demand locations, amenities, and market presence. This type of property commands the highest rental rates. Class B buildings have finishes, systems, and location that ranges from fair to good. Rents are average for the area. Class C properties are average to below average in location, systems, and amenities. The rents are at or below average for the area. Another way to categorize office buildings is by the number of stories in the building. Low-rise is one to six stories. Mid-rise is seven to twenty-five. High-rise buildings are twenty-six stories and greater.

MULTIFAMILY

Multifamily properties are also known as apartments and are five units or more and can be categorized in two ways. Just like office buildings, apartments can be classified as Class A, Class B, and Class CThe criterion for determining the class is the same as office buildings and relies on location, amenities, and systems. The other way to categorize multifamily is by the number of stories, again just like office buildings. Garden-style is two to four stories, Mid-rise is five to nine stories, and High-rise is ten or more stories.

INDUSTRIAL

One of the more active property types is Industrial buildings. The main drivers include the rise in e-commerce activity, same-day delivery, and the desire to minimize supply-chain bottlenecks. The industrial sector has three main types: Manufacturing (Heavy or Light, depending on intensity of use), Warehouse (<15% office space), Flex/R&D (30% or more office space).

MIXED-USE

When a property combines two or more uses such as office, retail, or residential then this is considered a Mixed-use property. Typically, in larger downtown areas you will find all three uses within a development. In smaller markets, the most popular mixed-use combination is retail and residential.

HOSPITALITY

Hospitality is another type of real estate that is based on hosting guests. One way hospitality is categorized is by the level of service that is provided. There are three main levels – Full service (e.g. Ritz Carleton, Hilton), Limited service (e.g., Holiday Inn Express), and Budget (e.g., Motel 6). With a full service hotels there will be numerous amenities and many guest services including room service, restaurants, spa or wellness center, and one or more retail shops. A limited-service property may have some amenities like a pool or business center, however, usually, the food and beverage choices are limited. In the budget category, the property will provide basic rooms and few, if any amenities. If there are amenities available, they usually are an extra cost.

SPECIAL PURPOSE

There are numerous uses that do not fit neatly into a particular category such as driving ranges, self-storage, and parking lots. These types of properties are considered Special Purpose. In most cases, a special purpose property is not easily converted to another use without a considerable outlay of capital.  

I have sold and invested in several commercial properties. To me, when selling commercial real estate, an important factor is to be completely transparent regarding all aspects of the property from the onset as all information will eventually be disclosed. As a buyer, or when I represent buyers, the most important aspect is the due diligence period. I am a stickler for the minute details on the disclosures and the provided numbers.

If you would like more information regarding investing in or selling commercial property, please reach out to me and we can discuss it in more detail.

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