10 Types of Commercial Real Estate

Real estate investing typically consists of commercial or residential properties. There are many key differences between the two types; Residential properties are mostly smaller and family-oriented while commercial properties can consist of anything from shopping centers to storage units. Other differences can include building materials, permits, codes, and required equipment. Many first-time investors might not be aware of how to distinguish between commercial and residential property. This guide will explain several different types of commercial real estate and how to navigate them through real estate investing. 

What is Commercial Real Estate? 

Commercial real estate includes properties with the potential to generate profits, either through capital gain or rental earnings. Examples of commercial property spaces range from office buildings and residential duplexes to restaurants and warehouses. Any property capable of generating income through leasing or resale qualifies as commercial real estate. 

How is Commercial Real Estate Different from Residential Property? 

Commercial real estate differs from residential property in the following aspects: 

1. Purpose: Apart from residential rental properties such as apartment buildings, commercial real estate primarily serves as a business venue rather than a dwelling. These spaces are designed to generate income for owners and investors by facilitating various business operations. 
2. Price: Commercial properties, often comprising large buildings on extensive plots of land in bustling commercial zones, demand significantly higher prices compared to residential properties. Consequently, they are more commonly owned by investor groups rather than individuals. 
3. Occupancy: Residential properties typically see owner occupation, whereas commercial properties are predominantly occupied by business tenants who lease the space from the property owner or a syndicate of investors. 
4. Lease terms: Lease durations in commercial real estate tend to be longer compared to residential rentals. Retail and office spaces, for instance, often have lease terms spanning 5 to 10 years, contrasting with the shorter lease periods typically seen in residential properties, which can range from six months to a year. 

10 Types of Commercial Property 

Commercial property includes a wide spectrum of properties, ranging from industrial spaces to hotels and vacant land, yet typically, it can be classified into the following categories: 

1. Office Buildings 

Office space can come in many sizes varying from a single tenant to large high-rise buildings. These buildings are abundant in urban and suburban neighborhoods. An upside to investing in office space is that tenants often sign long leases securing future ROI. On the other hand, tenant turnover can cause office investing to be more capital-intensive. Types of office spaces can include medical offices, commercially zoned homes, and central business district buildings. Office buildings are also separated into three tiers: Class A, Class B, and Class C. 

1. Class A office buildings are newer in age and at the top of competitors. Class A rent is above average considering these properties have a state-of-the-art, high-quality presence. Large, top-tier companies usually house these buildings. 
2. Class B office buildings rent about average and supply adequate space to their tenants. These are very common spaces and give off the standard “you get what you pay for” idea. 
3. Class C office buildings are of the lowest quality, renting below average, and often compete for tenants rather than the contrary. 

2. Industrial Property 

Like office buildings, industrial properties heavily vary in size and purpose. They can simply be used to store things or be a place of work for businesses. These spaces are typically in low-rise buildings in more urban areas or industrial parks. The demand for these properties will vary by location, but they can certainly make a good investment. Types of industrial properties can include: 

1. Light Assembly 
2. Heavy Manufacturing 
3. Storage Units 
4. Research Facilities 
5. Cold Storage 
6. Bulk Warehouse 
7. Showrooms
    

3. Multi-Family Housing 

Although similar to residential property, multi-family housing becomes commercial property when it has more than one unit. Like office buildings, multi-family housing can be classed into the three categories stated above. These properties can be a great place to start for investors wanting to transition from residential real estate. With rental prices increasing and high demand for units, investments in these types of properties are becoming quite popular. Types of multi-family housing can include: 

1. High-Rise Apartments 
2. Mid-Rise Apartments 
3. Garden-Style Apartments 
4. Duplex, Triplex, or Quadplex 
5. Subsidized Housing 
6. Student Housing 
7. Senior/Assisted Living 

4. Hospitality 

Although this category might seem less popular than others, there is a lot of investment potential in hospitality properties. These typically serve travelers as temporary, short-term residences. Hospitality offers accommodation, entertainment, and meals to its guests. Types of hospitality properties can include: 

1. Boutique Hotels 
2. Budget or Limited-Service Hotels 
3. Short Term Rentals 
4. Full-Service Hotels 
5. Casinos 
6. Extended-Stay Hotels 
7. Resort
    

5. Retail Space 

Investing in retail space is similar to office and industrial properties. Location is essential with retail so that the businesses have steady traffic. These properties house restaurants and retailers and can come in many different concepts. Retail space can have multiple tenants or a single tenant in a standalone building. Types of retail space can include: 

1. Regional Mall 
2. Strip Shopping Center 
3. Community Retail Center 
4. Outparcel 
5. Power Center 

6. Life Sciences 

During and after 2020, the life sciences property type has experienced a surge in popularity, with attention shifting towards both proactive and reactive healthcare.  

Although life sciences represent one of the fastest-growing markets in real estate, investors often encounter competition for development sites. Due to the highly specialized operational needs across different life sciences sectors, companies have significantly varied requirements for space and facilities. The term “life sciences” includes various fields such as 

1. Biotechnology  
2. Pharmaceuticals 
3. All related to advancements in healthcare and medicine 

7. Special Purpose  

Some buildings do not fit directly into the categories of commercial real estate mentioned earlier; instead, they fall into the category of special-purpose real estate. These structures include: 

1. Amusement parks 
2. Churches 
3. Schools 
4. Theaters 

In general, any building tailored for a highly specific activity or demographic falls under the category of special purpose. 

8. Mixed Use 

Certain properties span multiple real estate asset classes, qualifying them as mixed-use properties. For instance, numerous downtown high-rises incorporate this concept, featuring retail outlets on their lower levels and residential units above. 

Mixed-use properties include various real estate asset classes, incorporating elements of retail, industrial, office, and residential spaces. 

9. Self-Storage 

After the pandemic, self-storage has surged in demand due to its low operating expenses, minimal upkeep, and ample storage capacity. Over the last decade, investment in self-storage construction has skyrocketed by 926%. 

Moreover, this simplicity streamlines scalability. By understanding migration trends and employment expansion, investors can seamlessly venture into new markets while minimizing maintenance and utility expenditures. While market dynamics impact migration, self-storage demonstrates notable resilience to economic downturns. 

10. Land 

Investing in land stands as one of the riskiest endeavors in commercial real estate, but it also offers the prospect of the greatest rewards. With undeveloped land, the responsibility for generating revenue falls squarely on the investor. Examples of life sciences spaces include: 

1. Agricultural Land: Referred to as greenfield land, this includes farms, ranches, and other unimproved portions without any structures. 
2. Infill Land: These are urban lots currently devoid of development but with a history of prior use. 
3. Brownfield Land: These plots previously housed commercial structures and often come with environmental considerations due to past industrial activities. 

Pros and Cons of Investing in Commercial Real Estate 

Considering the advantages and disadvantages of investing in commercial real estate can assist you in determining its suitability for your investment strategy. 

Benefits of investing in commercial real estate: 

1. Historically, commercial real estate tends to deliver significant returns on investment, particularly in regions characterized by high demand and limited inventory. 
2. Offers extended lease terms compared to residential properties, ensuring more stable cash flow. 
3. Combines short-term cash flow from leasing with long-term gains through capital gains. 
4. Enhances portfolio diversification and potential control over return on investment. 
5. Sectors like government and healthcare may offer greater resilience during economic downturns. 

Drawbacks of investing in commercial real estate: 

1. The buying and selling processes are prolonged, reducing liquidity compared to other investment options. 
2. Initial investment requirements may be higher, especially when opting for individual property ownership. 
3. Susceptibility to economic downturns, especially noticeable in retail and small business sectors. 
4. Tenant turnover can be time-consuming and costly due to varying space layout needs. 
5. Direct investment demands comprehension of commercial real estate regulations, laws, and best practices. 

Conclusion 

Commercial real estate presents a diverse range of profitable opportunities for owners, investors, and tenants, but it may not suit everyone. Exploring the commercial real estate industry can enhance your comprehension of its intricacies and showcase new possibilities for diversifying your portfolio or expanding your business. 

Contact us at BFPM for more details on commercial real estate or property management. 

To learn more information about investing in commercial real estate, check out Reasons to Invest in Multifamily Real Estate.

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The Ultimate Guide to Corporate Housing: Everything You Need to Know