The term commercial real estate encompasses any property that’s specifically intended for business activities, namely rental income and capital gains. Before you can develop a real estate investing strategy and start comparing cap rates, you need to understand the different types of commercial real estate. Properties are divided into different real estate asset classes based on various factors, but specifically, the intended use.
Many of these differences are basic and obvious, but other more nuanced differences can guide your investing strategy. Understanding where certain real estate asset classes can fit into your investment strategy will provide a clearer roadmap toward the best risk-adjusted returns for your firm.
Types of Commercial Real Estate
What’s a Real Estate Asset Class?
Simply put, a real estate asset class is a type of commercial real estate that investors purchase. These real estate asset classes are broken down by their intended purpose, among other factors like price, location, and more. Each type of commercial real estate carries its own unique risks and benefits, which help investors understand whether or not a building is a worthwhile investment. Within each real estate asset class, there are several different types of properties.
While there are significant differences, one asset class isn’t necessarily better than the other–the types of commercial real estate appeal differently depending on investing strategies.
8 Types of Commercial Real Estate Buildings & Properties
The term multifamily real estate comprises all residential real estate, with the exception of single-family homes. This type of commercial real estate includes high-priority investments like apartments, co-ops, townhomes, and more. Multifamily properties are often further subdivided into Class A, Class B, and Class C properties depending on their location, condition, and more.
Living spaces are essential, meaning these buildings will always carry some degree of value. Nonetheless, market factors may influence where people move and how much they’re willing to spend. Investors also consider the ability to raise rent annually a strategic way to balance net operating income as inflation occurs.
Some of the most common types of buildings within the multifamily real estate asset class include:
- Duplex, Triplex and Quadplex: Rental properties that are divided into two-unit, three-unit, and four-unit homes, respectively. These types of buildings are available in nearly every market. It’s not uncommon for individual investors to live in one unit, while renting out another.
- Garden Apartments: Low-rise rental apartment buildings that typically offer tenants shared outdoor space, yards, or gardens. Garden apartments are typically in the suburbs, but can be anywhere.
- Mid-Rise Apartments: Multifamily rental apartment buildings with at least 5 or more stories and an elevator, which are generally located in urban areas.
- High-Rise Apartments: Multifamily rental apartment buildings with at least 10 or more stories and an elevator, which are generally located in larger, more densely populated markets. Most high-rise apartments have over 100 units, with professional management overseeing leases and maintenance.
- Walk-Up: An apartment building with 4-6 stories, and by definition, no elevator.
- Student Housing: Properties built specifically for student use in areas close to colleges and corresponding downtown areas. Many have large common areas.
- Senior & Assisted Living: Properties built specifically for seniors, which are normally in neighborhoods where elderly populations reside.
Office buildings account for another major real estate asset class. Ranging from single-story buildings in suburbia to multi-story urban office buildings, office buildings can be a lucrative type of commercial real estate investment. However, preparing spaces for new tenants can also be expensive.
Because most office buildings are developed for multiple tenants, investors can generate several revenue streams. This structure provides a level of income diversity, helping investors to retain cash flow even in the event that a tenant terminates a lease. Compared to other types of commercial real estate properties, office leases tend to be longer, too. As a result, office investors don’t take on as much risk.
Office buildings are generally divided into three classes, based on the building’s age, condition, location, and more:
- Class A Office Buildings: The highest quality office buildings available, with higher-than-average rents compared to neighboring buildings. Most are newly renovated, easily accessible in city areas, and offer tenants desirable amenities. Class A buildings are usually located in the central business district of the city.
- Class B Office Buildings: Competitive buildings that are generally priced around standard market rates. While they tend not to be in highly sought-after locations, Class B buildings may be equal or similar in quality to Class A buildings.
- Class C Office Buildings: Less-than-ideal quality buildings that tend to be priced below average market rates. Class C office buildings may provide tenants with usable space, but without the added perks of an accessible location or amenities.
Industrial buildings are an attractive investment due to their long-term return and leases, as well as low overhead costs.
Unlike other types of commercial real estate, industrial buildings are often located along interstate highways for added convenience in shipping and delivery. Especially as the eCommerce boom continues, and order fulfillment requires reimagined delivery infrastructure, industrial warehouses are in high demand.
There are a few different types of industrial buildings, which vary in size, layout, format, and in other ways:
- Heavy Manufacturing: Buildings that have undergone significant transformation to cater to the manufacturer’s unique machinery and process, which can’t easily be occupied by another tenant.
- Light Assembly: Buildings that are used for production and/or storage, but without tenant-specific floor plans.
- Bulk Warehouse: Large warehouses that are used for product distribution. Often, manufacturers will divide bulk warehouses by region, with strategic locations based on supply chains.
- Flex Industrial: Buildings that contain industrial storage and/or production space, as well as office space for corporate personnel.
In commercial real estate, the label retail applies to any buildings occupied by businesses offering products and services to customers, including stores, restaurants and more. The eCommerce boom has caused retail foot traffic to decline, but this type of commercial real estate still plays an important role in new ways within the retail business model.
Compared to other real estate asset classes, retail buildings tend to have longer leases. For investors, this means a stable source of cash flow, without questions about future income.
Retail properties are organized into several different categories, which vary significantly depending on the location, size, and other factors:
- Strip Malls and Shopping Centers: Clusters of stores that are grouped together, often in one or several unified buildings, to provide a centralized shopping experience. Some may have anchor tenants, or more noteworthy businesses that drive customers in and lead them to other stores.
- Community Retail Center: Complexes that generally have more than one anchor tenant and several smaller businesses, normally spanning 150,000-300,000 square feet.
- Power Center: A shopping center typically located near an interstate highway with at least one anchor tenant. Power centers typically have outparcels.
- Regional Mall: A larger complex offering a variety of retail and restaurant options with several anchor tenants, such as big box retailers. Malls normally span 400,000 to 2,000,000 square feet, including higher-end shops, restaurants, and entertainment options.
- Outparcel: Parcels of land within other larger plots leased to other tenants, such as shops, restaurants, fast food, chains, and more. Outparcels tend to rely on larger buildings for foot traffic.
5. Hotels & Hospitality
The hotels and hospitality category comprises buildings offering both short-and long-term accommodations to travelers, both for leisure or business purposes.
Like many others, the return on the hotel real estate asset class fluctuates based on the ebbs and flows of the economy, particularly travel and entertainment. The recent rise of Airbnb also presents complications to the long-term welfare of the hotel and hospitality industry.
Some hotels are owned by a corporation, operating as part of a chain. Boutique hotels typically feature a unique and thematic design concept, and are typically privately owned. These are some of the most common types of hotels:
- Limited Service: Facilities where residents are left to their own devices, without room service, restaurants, or a concierge
- Full Service: Facilities offering residents both room service and a restaurant
- Extended Stay: Hotels designed to accommodate guests for the long term, including service, a kitchen, and larger rooms
- Resort: Full-service facilities that generally include an entertainment element in addition to accommodations, such as an amusement park or beach
Land is one of the riskiest types of commercial real estate to invest in, but can also offer the highest return. By definition, undeveloped land leaves the onus of generating revenue entirely on the investor. There are a few types of properties that fall within this category, and each presents unique challenges and opportunity when it comes to portfolio growth:
- Agricultural Land: Also called greenfield land, this category includes farms, ranches, and other land without buildings
- Infill Land: Urban plots that are currently vacant, but were once developed
- Brownfield Land: Plots of land that previously held commercial buildings, usually with environmental stipulations
7. Mixed Use
Not all buildings fit squarely within the types of commercial real estate outlined above. Some properties fall into multiple real estate asset classes, making them mixed use properties. Many downtown high-rises are considered mixed use, with retail stores located on the first few floors and apartments above.
Mixed use properties may include real estate asset classes like retail, industrial, office, and residential.
8. Special Purpose
Not all buildings align directly with the types of commercial real estate outlined above. Others are considered special purpose real estate. These buildings are typically more difficult to value, given that there normally aren’t comparable properties in the area:
- Amusement parks
Overall, any building that’s created for a highly specific activity or group of people fits under the umbrella of special purpose.
Invest Across Asset Classes With Real-Time Visibility
The best type of commercial real estate to invest in depends entirely on your firm’s prior successes and investment strategy. But regardless of how you choose to allocate your funds, understanding the state of your acquisitions pipeline shouldn’t be a challenge.
Unfortunately, many firms suffer from siloed spreadsheets and disconnected workflows, which create additional hurdles when it comes time to review these crucial tasks.
Watch Dealpath’s webinar about how you can utilize real estate investment software to get real-time visibility into your sales pipeline, and uncover the competitive secrets within your deal data.