Different Types of Commercial Real Estate
When it comes to the world of real estate, commercial properties play a significant role. Commercial real estate refers to any property that is larger than a single-family home, encompassing a wide range of buildings and land use types.
As an aspiring investor or someone looking to understand the industry better, it’s essential to have a comprehensive understanding of the various types of commercial real estate available.
In this guide, we will explore the eight major categories of commercial real estate, discussing their characteristics, examples, and investment potential.
From multifamily properties to office buildings, industrial spaces, retail properties, hotels, mixed-use developments, land, and special-purpose properties, each category offers unique opportunities and challenges.
So, let’s dive into the exciting world of commercial real estate and discover the different types that make up this vast industry.
Different Types of Commercial Real Estate
1. Multifamily Properties
Multifamily properties serve as a bridge between residential and commercial real estate. While they can be used primarily for residency, their main purpose is investment.
The multifamily asset class encompasses a wide range of properties, from duplexes to multi-hundred unit apartment buildings.
Duplexes, triplexes, and quadruplexes are rental properties with two, three, and four units, respectively.
These types of properties can be found in virtually every market and are popular among beginning investors who want to generate income by renting out the additional units while living in one themselves.
Garden apartments emerged in the 1960s and 1970s as young people started moving from urban centers to the suburbs.
These apartments are typically 3-4 stories tall, housing 50-400 units, with no elevators and surface parking.
They are often part of a collection of low-rise apartment buildings on a single property, sharing yard or other land space.
Mid-rise apartments are usually 5-12 stories tall, with 30-110 units and elevator service.
They are commonly constructed in urban infill locations, making efficient use of available space in densely populated areas.
High-rise apartments are typically found in larger markets and are professionally managed. While the exact number of stories defining a high-rise building may vary, most markets consider buildings exceeding 10-12 stories as high-rise.
Once a building surpasses 40 stories and reaches a certain height, it is often considered a skyscraper.
2. Office Buildings
Office buildings, like multifamily properties, are categorized as low, mid, or high rise based on their size.
They are essential for businesses, providing spaces for companies to operate and conduct their day-to-day activities.
Class A, B, and C Office Buildings
Office buildings are often classified as Class A, Class B, or Class C, depending on their construction quality and location.
Class A buildings are considered top-tier properties, boasting excellent construction and prime locations.
Class B properties have high-quality construction but may be situated in less desirable areas. Class C buildings are usually older and may require renovation or improvements.
Central Business District (CBD)
Office buildings located in a city’s central business district (CBD) are at the heart of the urban core.
These high-rise buildings are commonly found in larger cities like Chicago or New York and serve as commercial hubs.
They are surrounded by a multitude of businesses and attract a significant amount of foot traffic.
Suburban Office Buildings
Suburban office buildings are typically mid-rise structures ranging from 80,000-400,000 square feet.
These buildings are located outside city centers and provide office space for businesses in suburban areas.
Suburban office parks, consisting of multiple mid-rise buildings, are also common, offering a campus-like setting for businesses.
3. Industrial Properties
Industrial properties encompass a wide range of spaces used for manufacturing, assembly, storage, and distribution.
They vary in size and specifications, catering to different industry needs.
Heavy manufacturing properties are specifically designed for large manufacturers.
These properties often feature customized machinery and require substantial renovations to adapt them for other tenants.
Due to their specialized nature, these properties are not frequently available on the market.
Light assembly properties are less complex than heavy manufacturing properties and can be easily reconfigured.
They are commonly used for storage, product assembly, and office space. Light assembly properties offer versatility and can accommodate a variety of industries.
Flex warehouses are industrial properties that combine both industrial and office space.
They are designed to be easily convertible and adaptable to the needs of different businesses.
Flex space is often considered mixed-use and offers a flexible solution for companies requiring both manufacturing and administrative functions.
Bulk warehouses are large properties ranging from 50,000 to 1,000,000 square feet.
These properties are primarily used for regional product distribution and require easy access to highway systems for smooth transportation of goods.
4. Retail Properties
Retail properties play a crucial role in the economy, providing spaces for businesses to sell products and services to consumers.
They come in various forms, catering to different types of retail businesses.
Strip / Shopping Center
Strip centers are smaller retail properties that may or may not have anchor tenants.
Anchor tenants are larger retail establishments that attract customers to the property, such as Wal-Mart or Home Depot.
Strip centers typically feature a mix of small retail stores, including restaurants, dry cleaners, nail salons, and more.
Community Retail Center
Community retail centers are larger than strip centers and typically range from 150,000 to 350,000 square feet.
They often have multiple anchor tenants, such as grocery stores and drug stores, along with restaurants.
Community retail centers serve as gathering places for local communities and offer a diverse range of retail options.
Power centers are characterized by the presence of major box retailers, such as Wal-Mart, Lowes, Staples, and Best Buy.
These centers consist of several smaller inline retail stores, with each big box retailer occupying a significant amount of space.
Power centers also typically include various out parcels, which are separate parcels of land designated for individual tenants like fast-food restaurants or banks.
Regional malls are large-scale retail properties ranging from 400,000 to 2,000,000 square feet.
They feature multiple anchor tenants, including department stores and big box retailers like Barnes & Noble or Best Buy.
Regional malls offer a wide range of retail options and amenities, making them popular destinations for shopping and entertainment.
Out parcels are individual parcels of land within larger retail centers, primarily designated for standalone tenants such as fast-food restaurants or banks.
These smaller properties provide convenient access for customers and often benefit from the foot traffic generated by the larger retail center.
Hotels are an essential part of the hospitality industry, providing accommodation for travelers and tourists.
They can be classified into different types based on their services and target markets.
Full Service Hotels
Full-service hotels are typically located in central business districts or popular tourist areas.
They are associated with well-known hotel chains like Four Seasons, Marriott, or Ritz Carlton.
Full-service hotels offer a comprehensive range of amenities and services, including room service, on-site restaurants, and convention spaces.
Limited Service Hotels
Limited service hotels are often boutique properties that cater to a specific niche or target market.
These hotels are smaller in size and do not provide the same level of amenities as full-service hotels.
They are an attractive option for travelers seeking a more intimate and personalized experience.
Extended Stay Hotels
Extended stay hotels are designed for guests who plan to stay for an extended period, typically a week or more.
These hotels offer larger rooms with small kitchens, making them suitable for guests who desire the comforts of home while on an extended trip.
6. Mixed-Use Developments
Mixed-use developments combine multiple types of commercial real estate within a single property.
They often feature a mix of office, residential, retail, and industrial spaces, creating vibrant and diverse communities.
Office and Residential Mix
One common form of mixed-use development is the integration of office and residential spaces.
These developments often feature office buildings on lower floors, with residential units situated above.
This arrangement allows for convenient access to work, reducing commuting time and enhancing the live-work experience.
Retail and Residential Mix
Another popular combination is the integration of retail and residential spaces. These developments typically have ground-level retail stores or restaurants with residential units on upper floors.
This configuration provides residents with easy access to shopping and dining options, enhancing their overall living experience.
Office, Retail, and Residential Mix
Some mixed-use developments incorporate a combination of office, retail, and residential spaces.
These developments create self-contained communities where residents can live, work, and shop without leaving the property.
They offer a high level of convenience and can foster a strong sense of community among residents and workers.
Land is a fundamental component of the real estate industry and can be classified into different types based on its current state and potential for development.
Greenfield / Agricultural Land
Greenfield land refers to undeveloped land, such as farms or pastures. It can also include various types of agricultural land, such as orchards, animal farms, and ranches.
Greenfield land offers opportunities for agricultural development or conversion into other land use types as per local regulations.
Infill land is located within already developed areas of a city. It refers to vacant land that is surrounded by existing buildings or infrastructure.
Infill land is particularly valuable in urban locations, where it presents opportunities for the development of new projects within established neighborhoods.
Brownfields are parcels of land that were previously used for industrial or commercial purposes but are now available for re-use.
These properties often require environmental remediation due to potential contamination.
However, with proper cleanup and redevelopment, brownfield land can be transformed into vibrant and sustainable spaces.
8. Special-Purpose Properties
In addition to the major categories discussed above, there are various other types of commercial real estate that fall under the special-purpose classification.
These properties serve niche markets and cater to specific industries or activities.
Amusement parks are specialized properties designed for entertainment purposes.
They feature rides, attractions, and entertainment shows, attracting visitors of all ages.
Amusement parks require significant investments and expertise to operate successfully.
Bowling alleys are dedicated properties for bowling enthusiasts. They provide lanes, equipment, and other amenities for recreational and competitive bowling activities.
Bowling alleys may also include dining areas, bars, and arcade games to enhance the overall customer experience.
Parking lots are spaces specifically designated for vehicle parking. They can be standalone properties or part of larger commercial developments.
Parking lots serve as a crucial component of the transportation infrastructure, providing convenient parking options for businesses, events, and public spaces.
Stadiums are large-scale properties designed for hosting sporting events, concerts, and other live performances.
These specialized venues require extensive seating, facilities, and infrastructure to accommodate large crowds.
Stadiums are often iconic landmarks within cities, attracting visitors and contributing to the local economy.
Theaters are properties dedicated to the performing arts, including stage plays, musicals, and other live performances.
They come in various sizes, ranging from small community theaters to grand opera houses. Theaters provide spaces for cultural and artistic expressions, enriching the local arts scene.
Zoos are specialized properties that house a diverse range of animal species for public viewing and education.
They offer educational programs, exhibits, and interactive experiences to engage visitors and promote wildlife conservation.
Zoos play a vital role in raising awareness about biodiversity and environmental conservation.
Understanding the different types of commercial real estate is crucial for investors, business owners, and industry professionals.
Each category offers unique opportunities and challenges, catering to different market demands and investment strategies.
From multifamily properties to office buildings, industrial spaces, retail properties, hotels, mixed-use developments, land, and special-purpose properties, the commercial real estate industry encompasses a wide range of options.
By exploring and learning about these different types, you can make informed decisions and navigate the dynamic world of commercial real estate with confidence.