What are the 5 different types of commercial real estate?
According to www.remony.com, a commercial real estate data aggregator
site, there are over 55 million commercial properties in the US. Given their
size and scope, it’s important to discuss the different commercial property
types so you can get a better understanding of each. In this booklet, we’ll seek
to provide you with an overview of each property type.
Multifamily
With the increasing popularity of websites such as Biggerpockets.com, this commercial
property type has become one of the most popular to invest in. As it pertains to
commercial investing, multifamily properties consist of residential buildings with more
than 4 units. This encompasses ones as small as 5-units to as large as
multi-thousand-unit complexes. There are 3 classes of multifamily properties. These
are:
Class A: The most prestigious and highest quality apartments in a given area. They’re
close to many of the best restaurants, bars and entertainment centers. These
apartments are rented by affluent households and command above average rents. They
usually have high-quality finishes, state-of-the-art systems, great accessibility, excellent
amenities and a definite market presence.
Class B: Although not as highly coveted as Class A apartments, these buildings still
attract a broad base of tenants. These include middle class families, young
professionals and retirees who don’t want to deal with the responsibility that comes
with owning a property. However, tenants of Class B apartments will be much more
price conscious than their Class A counterparts. Therefore, rents will tend to be in the
average range for the area. Building finishes are usually fair to good, amenities are
adequate, and they’ll be located near a handful of good restaurants, bars and retail
centers.
Class C: These apartments are often not the most appealing. They may be antiquated,
poorly maintained and/or inconveniently located. As a result, tenants who seek out
these spaces are often extremely price conscious. They’re just looking for functional
living space and are only willing to pay rent that is below the average for the area.
Retail
With over 3.4 million storefronts in the US, retail properties are one of the most
common types of commercial real estate. As a free market society, our economy relies
on the exchange of goods and services. Because these exchanges often require
face-to-face interaction, many businesses need a physical location to conduct their
day-to-day operations. This presents a unique opportunity for real estate investors who
are interested in renting space to these individuals. There are 3-classes of retail space.
These are:
Class A: The most upscale and accessible retail properties in a given area. They’re
located along high traffic roadways with affluent demographics, they house many large
national retailers with upscale brands and have plenty of parking, both self-serve and
valet, to offer prospective shoppers. These retail locations are rented to affluent
business owners who require a high-quality location as part of their brand. For this
reason, they’re often willing to pay above market rent. In exchange for renting space at
these properties, tenants are offered a slew of amenities including, but not limited to,
access to a garage, valet parking, boutique windows, high quality awnings etc.
Class B: Although not as highly coveted as Class A retail, these buildings still attract a
broad base of tenants. These range from small mom-and-pop retailers, regional chains
and well-established national businesses. However, tenants of Class B retail space are
often much more price conscious than their Class A counterparts. Therefore, rents tend
to be in the average range for the area. Building finishes are usually fair to good,
amenities are adequate, traffic counts are satisfactory, and the area’s demographics will
be comprised of middle-class households.
Class C: These retail buildings are not the most desirable. They may be antiquated,
poorly maintained and/or inconveniently located. As a result, tenants who seek out
these spaces are often extremely price conscious. They’re just looking for functional to
operate their business out of and are only willing to pay rent that’s below the average for
the area.
Office
If you work in a corporate environment, you’re probably quite familiar with this
property type. Office buildings are generally organized into two categories: urban or
suburban. Urban office buildings can be found in large metropolitan areas and include
skyscrapers and high-rise properties, some of which, total as much as a few million
square feet in size. On the other hand, suburban office buildings are usually smaller in
stature and are sometimes grouped in office parks.
Office buildings can be “single-tenanted” (i.e. housing one tenant) or “multitenanted”
(i.e. housing more than one tenant). According to the Building Owners and
Managers Association International (BOMA), office buildings are ranked into three tiers.
These are:
Class A: The most prestigious and highest quality buildings in a given area. These
spaces compete for premier office users and command above average rents. They
usually have high-quality finishes, state-of-the-art systems, great accessibility and a
definite market presence.
Class B: Although not as highly coveted as Class A office space, these buildings still
compete for an array of users. These range from small local businesses to large national
tenants. However, Class B tenants will be more price conscious than their Class A
counterparts. Therefore, rents will be in the average range for the area. Building finishes
are usually fair to good for the area and systems are adequate.
Class C: These building are often not the most appealing. They may be antiquated,
poorly maintained and/or inconveniently located. As a result, tenants who seek out
these spaces are often extremely price conscious. They’re just looking for functional
space and are only willing to pay rent that is below the average for the area.
Industrial
This is one of the most intriguing property types that I continue to enjoy learning about.
Industrial properties range from small 1000 sq. ft. workshops to massive industrial
spaces of more than 1,000,000 sq. ft. Some of the uses of industrial buildings include
logistics (i.e. trucking, distribution etc.), manufacturing, construction, trades (i.e.
electrical, plumbing, contractors etc.) as well as many more. There are 3 tiers of
industrial properties. These are:
Class A: These are the most hi-tech, highest quality and strategically located buildings
in a given area. They’re close to major roadways, are equipped with state-of-the-art
heavy machinery, have plenty of loading bays for large trucks etc. These spaces
compete for large, well-established industrial clients and command above average
rents.
Class B: Although not as highly coveted as Class A industrial space, these buildings still
compete for a wide range of users. Potential tenants include small local manufacturing
operations to large regional industrial companies. However, Class B tenants are more
price conscious than their Class A counterparts. Therefore, rents will be in the average
range for the area. These buildings are generally relatively close to major roadways,
have functional equipment, have a variety of loading bays but may be slightly older and
not as functional.
Class C: These buildings are not the most appealing. They may be antiquated, poorly
maintained and/or inconveniently located. As a result, tenants who seek out these
spaces are often extremely price conscious. They’re just looking for functional space and
are only willing to pay rent that is below the average for the area.
Hospitality
This property type is one that’s prevalent in large metropolitan areas. The hospitality
industry consists of 7 sectors. These include accommodation, food and beverage,
meeting and events, gaming, entertainment and recreation, tourism services, and visitor
information. There are 3 tiers of hospitality properties. These are:
Class A: These are the most prestigious, highest quality and conveniently located
buildings in a given area. They’re close to the city’s major attractions, offer the most
luxurious amenities, have a well-trained staff who can handle almost any request made
by their guests etc. These hotels attract an affluent clientele who are willing to pay a
premium price.
Class B: Although not as highly coveted as Class A hotels, these buildings still attract a
wide range of guests. These include families on vacation to businesspeople travelling for
work. However, Class B tenants are more price conscious than their Class A
counterparts. Therefore, nightly rates will be close to the average range for the area.
These buildings are generally close to major roadways, have basic amenities and may
afford tenants benefits such as a free continental breakfast, free parking, free
high-speed internet etc.
Class C: These buildings are not the most appealing. They may be antiquated, poorly
maintained and/or inconveniently located. As a result, guest who stay at these hotels are
often extremely price conscious. They’re just looking for a cheap place to spend the
night and are only willing to pay below the average nightly rate for the area.
If you’re interested in buying, selling or leasing commercial property, I’d be happy to
help! With over 40 years of combined experience, our brokerage is well equipped to help
you navigate the many facets of a commercial real estate transaction. Feel free to reach
out to me via email at raphael@grisantigroup.com or give me a call at 502-536-7315. I
look forward to being your go-to resource for all your commercial real estate needs!