To help manage the colossal scope of their industry, commercial brokers and investors have split it into five types of commercial real estate. Below, I’ll talk about what these different categories include and what to look for when investing in them.
Office buildings range in size from the small suburban office parks to the towering skyscrapers in downtown New York City. To help differentiate between them, the category is broken down further into Class A, Class B and Class C buildings.
Class A is the premiere, cream-of-the-crop office building. They usually include high quality designs, a coveted location and above-average rent.
Class B is the average, everyday office building. They compete for a wide range of tenants and have a reasonable rent for the market.
Finally, Class C buildings are beginning to show their wear. They offer functional, if outdated, workspaces at below average rents.
Office real estate is influenced by factors like the local economy and the region’s industry focus – financial and technology companies demand a lot of space. The leasing companies may require special clauses in their contracts like the right to contiguous space.
Industrial buildings are usually located outside of urban areas and along transportation routes. They are separated into four different classes: heavy manufacturing, light assembly, bulk warehouses, and flex industrial (a mix of industrial and office spaces.)
Manufacturing buildings are often outfitted specifically to a single tenant and may require extensive remodeling if a new one moves in. Warehouse are more generic and can be filled fairly quickly should your current tenant move out. Industrial buildings tend to have long leases meaning, over time, rent may fall behind the market.
Retail is a huge category that includes buildings like malls, shopping centers, restaurants, big box stores and more.
Before purchasing retail real estate, it’s important to consider its location and the state of the local economy. Both of these will play a big role in the success of your investment. As with industrial buildings, retail spaces generally have long leases that may fall behind current market rent prices, and new tenants may require extensive remodeling to keep with their brand identity.
Formally considered residential real estate, apartments of all sizes are now considered types of commercial real estate due to growing urbanization.
MultiFamily units are considered one of the safer bets in commercial real estate investment. A single vacancy in large buildings is unlikely to have a heavy effect on income and leases are short enough (1 -2 years) that you can react quickly to changing market prices for rent.
Finally, special purpose buildings are the last of the types of commercial real estate and include everything else not mentioned above. Amusement parks, hospitals, storage units, hotels and more all fall into this category, and each type requires a unique approach.