Commercial real estate is a broad term that encompasses a variety of property types, from retail stores and industrial warehouses to office buildings and multifamily housing. While each type of commercial real estate has its own set of unique characteristics, they all share certain similarities in terms of how they are bought and sold.
All in all, there are eight different types of commercial real estate properties. We will explore the different kinds of commercial real estate properties available on the market today, as well as some tips for investing in them. By understanding these key aspects of commercial real estate investing, you can make informed decisions about what kind of property fits your needs.
A retail property has leased spaces that merchants use to offer products or services straight to customers through a storefront. Investors prefer these properties since they are highly visible, and the tenants typically sign long-term contracts. However, their activity levels also rely heavily on broader economic conditions as well as consumer spending power.
Shopping centers known as power centers are typically between 250,000 – 600,000 square feet in size and serve the public within a 5-10 mile radius. These retail outlets typically feature a big-name department store brand such as Home Depot, Target, Costco, etc. as their main tenants while also providing room for smaller retailers to open shop, known as an outparcels.
An outparcel is an area of commercial retail property that’s set aside for smaller tenants, typically next to or inside of a big-name department store. Outparcels are usually leased as separate properties from the main space. They provide an opportunity for retailers to benefit from being associated with larger chains while still having their own distinct identity.
Commercial real estate (CRE) refers to properties used specifically for business purposes or to generate income, rather than for residential living. It is a broad category that includes everything from office buildings and warehouses to retail centers, hotels, and apartment buildings. Investing in commercial real estate can provide stable cash flow as well as long-term appreciation. However, it requires significant capital and specialized expertise compared to investing in residential real estate.
In this comprehensive guide, we will overview the major types of commercial real estate, their key characteristics, and tips for investing in each one.
The 4 Main Types of Commercial Real Estate
Commercial real estate is typically grouped into four main categories based on their purpose and use:
1. Office Space
Office buildings provide workspace for businesses and range greatly in size and class. Class A office buildings are newer properties located in prime areas with high-end finishes and amenities. Class B offices are a little older but still have good location and condition. Class C offices are older buildings that need renovation but have affordable rents.
Key Characteristics
- Long-term leases, often 5-10 years
- Creditworthy, established tenants
- Professional management and maintenance
Office space tends to provide stable income but lower appreciation than other CRE types. Purchase and renovation of Class B/C office buildings can boost returns.
2. Industrial
Industrial CRE includes warehouses, distribution centers, manufacturing facilities, and flex space. E-commerce and supply chain demands have driven massive growth in industrial real estate needs. Owners of warehouses and fulfillment centers leased to major tenants can achieve strong returns.
Key Characteristics:
- Long-term net leases to investment-grade tenants
- Specialized buildings to support operations
- Outsized rent growth and appreciation
Investing in industrial real estate near major metro areas and transportation infrastructure offers income and upside potential.
3. Retail
Retail CRE encompasses shopping centers, malls, restaurants, automotive properties, and mixed-use developments. Grocery and necessity-based retail has proved internet-resilient. High foot traffic and prominent signage also make retail properties advantageous for tenants.
Key Characteristics:
- Long-term leases with periodic rental bumps
- Combination of necessity, food, and service-based tenants
- High visibility locations near residential areas
Focusing on grocery/necessity-anchored neighborhood centers provides durable income streams. Avoid struggling malls and big-box centers.
4. Multifamily
Multifamily properties provide rental housing units in apartment complexes, townhomes, duplexes, and other configurations. Demand for apartments has surged with the rise of rental living, urbanization, and housing shortages.
Key Characteristics:
- Monthly rental income
- Population and job growth drive demand
- Residential lending financing readily available
Owning and operating multifamily in growing markets offers built-in tenant demand and inflation protection.
How to Invest in Commercial Real Estate
There are several paths for investing in commercial real estate:
Direct Ownership – Acquire ownership in individual CRE properties or portfolios. This requires substantial capital and expertise but offers full control and direct income.
Private Equity Funds – Pool capital with other investors in a fund managed by a sponsor that targets a specific sector like office or industrial. The fund handles acquisitions and management.
Public REITs – Invest in publicly traded real estate investment trusts that own portfolios of commercial assets. REITs provide diversified exposure to CRE with liquidity of stocks.
Crowdfunding – Platforms like CrowdStreet enable investing in individual deals or funds with other investors starting at minimums like $25k.
Mortgage Lending – Provide financing to CRE buyers and projects to earn interest income with less risk than equity ownership.
Here are some tips for investing successfully in each major CRE category:
How to Invest in Office Space
Locations: Focus on central business districts and urban infill areas with access to transportation and amenities. Suburban office can work near major highways and population centers.
**Tenants:**Seek creditworthy tenants with medium to long term leases like major corporations and professional firms. Avoid heavy exposure to co-working spaces.
Class B/C Value-Add: Acquire older Class B/C buildings below replacement cost that can be updated to command higher rents. Factor in renovation budgets and schedules.
Medical Office: Health care real estate benefits from large, stable medical tenants and growing demand. Look for affiliated properties on or near hospital campuses.
How to Invest in Industrial
Infill Warehouses: Last-mile infill warehouses in major metro areas allow rapid delivery to urban cores prized by e-commerce and logistics firms.
Distribution Hubs: Look for warehouses and fulfillment centers positioned near ports, rail lines, interstates, and airports to support national distribution networks.
Specialized Properties: Invest in specialized industrial like cold storage, data centers, and flex R&D space serving growth sectors like food, tech, and life sciences.
Long Leases: Target net leased warehouses and distribution centers with lengthy leases to investment grade tenants for durable income streams.
How to Invest in Retail
Necessity-Based: Focus on grocery and necessity-anchored neighborhood centers serving essential consumer needs. This retail has proven internet-resistant.
Experiential Retail: Dining, entertainment, and mixed-use properties that offer experiences beyond e-commerce like restaurants, theaters, and lifestyle centers.
Dense Urban Areas: Retail in dense urban cores and near public transit hubs benefits from high foot traffic and tourism.
Undermanaged Assets: Acquire underperforming centers that can be repositioned with improved tenant mixes, renovations, and hands-on management.
How to Invest in Multifamily
Growth Markets: Target cities and suburbs with solid job growth and in-migration to drive apartment demand. Research key economic and demographic trends.
Value-Add Rentals: Seek older properties that can be upgraded to achieve higher rents and returns through renovations, improved operations, and amenities.
Workforce Housing: Focus on reasonably priced apartments catering to working-class renters that offer stability through changing economic cycles.
Student Housing: Properties near college campuses benefit from built-in tenant demand and parental co-signing on leases.
Diversify Your CRE Investments
Since commercial real estate encompasses a wide range of property types and markets, it’s important to diversify your holdings:
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Invest across the key CRE categories of office, retail, industrial, and multifamily based on their market strengths.
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Target properties in different geographic markets to avoid overconcentration.
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Acquire individual assets and pool investments with funds to balance risk versus control.
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Allocate a portion of your portfolio to public REITs for liquidity.
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Consider debt investments via CRE mortgages and lending funds to complement equity.
Key Takeaways
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The four core types of commercial real estate are office, industrial, retail, and multifamily which have distinct characteristics.
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CRE investments can provide income stability from long-term leases along with appreciation potential.
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You can invest through direct ownership, funds, REITs, crowdfunding, and lending depending on your goals.
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Focus on the property types and markets with favorable supply/demand dynamics and avoid overexposure to any one area.
Commercial real estate delivers strong risk-adjusted returns for investors who understand each sector’s nuances. By diversifying across property types and markets, CRE can play an integral role in a well-balanced investment portfolio. Conduct thorough due diligence and partner with experienced sponsors to successfully navigate this complex asset class.
Strip Mall / Shopping Center
A strip mall is a short row of individual store fronts, typically situated along a busy road. These units are usually leased out to small business owners and may contain an anchor tenant to help draw customers to the area. Most strip malls will provide tenants with parking, which makes them attractive to customers and increases the value of the property. Strip malls may also be known as shopping centers or plazas, depending on their size.
High Rise/Mid Rise Buildings
High rise and midrise buildings are larger than garden apartments and usually consist of five or more stories. These properties are designed to provide tenants with luxury amenities, such as concierge services, upscale lobbies, and expansive views. High-rise buildings often contain retail space on the ground floor as well, making them attractive to potential investors.
Townhouses or condos are usually smaller in size than apartment complexes and typically have fewer units. These properties are usually sold off individually as separate investments, providing investors with the potential for capital appreciation.
Senior living properties are designed to meet the needs of seniors who are looking for independent living arrangements that offer more amenities and support than traditional apartments or condos. These types of properties typically offer residents access to on-site health care, communal areas to socialize and amenities to keep residents engaged.
Office buildings are commercial real estate properties that are designed for businesses to lease space and use as a workplace. These types of properties can vary in size and complexity, depending on their purpose. They may contain features such as shared conference rooms, private office spaces, or even retail space on the ground level.
Office buildings are typically categorized into one of four classes: Class A, Class B, Class C, or Class D. These are based on their quality of construction and location. Class A office buildings are the newest, highest quality, and most expensive type of office building. Class B buildings are middle-of-the-road properties that offer tenants adequate amenities at an affordable price. Class C buildings are the oldest, least desirable, and often in need of significant repairs or upgrades. Finally, Class D buildings are typically older buildings that may require additional investment before being ready for tenants.
Types of office buildings include:
Suburban office buildings are typically located in the outskirts of a city, usually in an industrial or commercial area. These types of properties are usually smaller and may contain fewer amenities than their larger counterparts. However, they can be attractive to tenants looking for lower rent prices and less competition for office space.
Central business district buildings are generally located within the heart of a city’s most desirable areas. These types of buildings typically house tenants who prefer to be close to amenities and other businesses in the area. They usually contain high-end amenities such as enclosed parking, on-site security, and expansive lobbies.
Medical office buildings are designed to provide medical practitioners with the space they need to practice medicine. These properties may contain features such as exam rooms, laboratory spaces, or other areas specifically tailored for medical professionals.
Commercially zoned homes are residential properties that have been re-purposed to be used as a business or commercial facility. These types of properties can provide investors with the potential for higher returns than standard residential rentals, since they are able to charge higher rent prices due to their unique use.
Industrial properties are commercial real estate properties that are designed to house businesses involved in the production, assembly, or storage of goods and materials. These types of properties can range from small warehouses to large factories with multiple stories and hundreds of thousands of square feet. The type of property an investor chooses will depend on the specific needs of their business.
Specific types of industrial properties include:
Flex warehouses are warehouses that can be used for a wide range of applications. These types of properties feature mixed-use zoning, meaning they can house a variety of uses in the same space. The property usually contains a mix of office, storage, and manufacturing space, which can be retrofitted to meet the specific needs of different tenants based on their industry or business model.
Light assembly buildings are commercial properties designed to house businesses that require space for light manufacturing or assembling of goods, which are then shipped to distribution centers. Like flex warehouses, light assembly properties can usually be changed to accommodate a variety of tenants, depending on the type of product they manufacture.
Heavy manufacturing buildings are typically larger commercial properties designed to house tenants that require space for large-scale production and assembly of goods. These types of buildings may contain features such as heavy machinery, dedicated loading docks, and multiple floors designed to accommodate the specific needs of these tenants. Unlike light assembly buildings, heavy manufacturing spaces are often built for specific applications, making them difficult to retrofit for other tenants.
Commercial Real Estate Investing 101 | The 5 Types of Commercial Real Estate
FAQ
What are the four 4 major types of commercial real estate in order of sophistication from least to most )?
What are the four types of commercial?
What are the 4 types of commercial real estate?
The four main classes of commercial real estate are office space, industrial, multifamily rentals, and retail. Commercial real estate provides rental income as well as the potential for some capital appreciation for investors.
What are the different types of commercial property?
Office and retail are types of commercial property, but there are many more than just those two. Commercial real estate can be divided into eight main types. The characteristic of each is unique, and there are also different tiers or specialty sub-sectors within these eight main categories of commercial property.
What are the different types of commercial retail real estate?
There are four types of commercial retail real estate: neighborhood community centers, strip centers, regional malls, and power centers. Property square footage, concept, and the variety and quantity of tenants will vary based on the type of retail property and the characteristics of the specific trade area the retail project is located in.
What types of commercial real estate assets are available?
They include: hotel, retail, industrial, mixed-use, office, multifamily, special purpose, and vacant land. For many investors, the easiest way to gain access to commercial real estate assets is through the publicly traded shares of a real estate investment trust.
