What Are The Different Types Of Commercial Real Estate You Can Invest In?
There’s a different type of commercial real estate to fit every investor.
Whether you’re looking for the flashy, “sexy” look that comes from investing or a more rugged, under-the-radar approach, there’s a type for you.
Here are the 5 primary types of commercial real estate you can invest in:
1. Multifamily
Simply put, multifamily real estate is a residential property with more than one unit.
For investors transitioning from residential to commercial real estate investing, multifamily properties are an easy first step since the tenant base is familiar.
Having multiple tenants within a single property creates multiple income streams, which helps remove a bit of the risk of the investment. If one tenant moves out of an apartment complex, chances are you won’t notice a big hit to your bottom line since you have many other tenants continuing to pay rent.
The multifamily asset class includes everything from duplexes with two tenants to apartment buildings housing hundreds.
Duplex / Triplex / Quadplex
Like their names imply, duplexes, triplexes, and quadplexes are two, three, and four-unit properties, respectively.
While “plexes” are considered multifamily since they have multiple units in one property, they provide tenants with a more residential home feel. Each of these units typically has its own entrance and they are similar in size.
These types of units are fairly commonplace in all markets across the United States and may have been originally constructed for multiple tenants or renovated over the years for such accommodations.
According to the National Multifamily Housing Council, close to 20% of renters live in a plex property.
Garden Apartments
Garden apartments are typically 3-4 story walk-ups with anywhere from 50-200+ units. This type of multifamily is often found in the suburbs where they can be spread out and offer surface parking.
Units in a garden-style apartment complex are usually studio, one-, two-, and three-bedroom apartments and may or may not have patio space and private balconies.
There are usually a collection of these apartment buildings on a single property, which may share amenities such as pools, clubhouses, playgrounds, dog parks, laundry rooms, fitness centers, and more.
Mid-Rise Apartments
Mid-rise apartments are typically between 4-11 stories and house anywhere from 30-100+ units. These projects are found closer to the urban core, where a developer can justify elevator service and garage-style parking.
These complexes tend to be newer or renovated, due to current demand for urban living, and as such may offer modern amenities like recording studios, libraries, and dog washing stations.
Walkable access to local conveniences, like coffee shops and nightlife, often drive demand for mid-rise apartments.
High-Rise Apartments
High-rise apartments are typically 12+ stories and can house 100+ units. These apartment buildings are found in the urban core of larger markets, often in and around the heart of the Central Business District.
Like mid-rise apartments, these projects are heavily amenity driven with elevator service, garage-style parking, and can even offer restaurants and cafes on the ground floor.
The walkability factor also drives up demand and pricing for units in high-rise apartment complexes.
Student Housing
Just like the name implies, Student Housing projects are designed to house college and university students. As such, they are located near educational centers and may be owned by an investment group, as well as universities and colleges.
Student housing is designed with common areas in mind first, so as to drive the residents from their rooms to socialize with their neighbors. Typical apartment housing is quite the opposite, where residents expect to have more privacy and a self-contained living unit.
This type of multifamily, like Senior and Assisted Living, has a very different model than the other products in this asset class and requires specialized knowledge.
Senior / Assisted Living
Senior and Assisted living is designed to provide housing for the elderly and aging population. Developers like to place these projects within the neighborhoods that have a preexisting senior population, so the residents don’t have to move too far.
These projects offer their tenants a higher level of support than other types of multifamily, such as on-call or in-house medical professionals, housekeeping, meal service, etc.
Residents in senior and assisted living facilities may have their own home or can save money by having roommates. These complexes often have a dedicated wing for memory care patients who need specialized attention.
2. Office
Similar to multifamily, a major factor that draws investors to office real estate is multi-tenancy. Depending on the style of the building and where it’s located, the property can have one to dozens of tenants.
Office spaces are further broken up into Class A, Class B, and Class C assets depending on their age and quality.
Office investing can be more capital intensive than other types of commercial real estate due to the cost of turning over and building out space for incoming tenants. However, because of the cap rate valuation on commercial real estate, offices can command some of the highest values.
Central Business District (CBD)
Office buildings located in a central business district are intended to house some of the city’s largest companies - such as Amazon, Bank of America, etc.
The CBD is characterized by high-density development, so these buildings are often mid to high-rise buildings with structured parking and elevator access. The ability to have naming rights to a building in the CBD may be a determining factor for larger companies when relocating their headquarters.
In most American cities, the CBD may be home to the city’s financial district but will often have entertainment and retail options. A number of professional services companies prefer to locate within these buildings due to the convenience and walkability factors.
Commercially Zoned Homes
Commercially zoned homes are often a favorite for smaller, local professional services companies. As they sound, they are former residential units, typically older homes, that have been rezoned or repurposed for commercial use.
Here, you’ll have a strong base of accounting firms, law firms, and other businesses that prefer to forgo the “corporate” feel that a traditional office building may bring. Many tenants also enjoy the “homeliness” that this type of office space can bring with full kitchens, patios, and fenced in backyards.
Tenants are also able to lease these on a standalone basis, so they won’t have to deal with the constant interruptions from other tenants.
Medical Office
Medical office space is professional space designed around the needs of the medical field and can be the most valuable and stable investments in the office world.
Tenants here can be any business from your local dentist to major surgery centers and hospitals. Medical tenants tend to spend quite a bit on their build-outs - upwards of $200+ per square foot, due to the requirements of their industry and the high-standard of aesthetics.
Since medical tenants often need more plumbing, larger elevators, and other specialized amenities, these leases tend to be 7-10+ years. Medical professionals also tend to stay in place for the long term, since the cost of moving and everything involved in doing so is high.
Suburban Office Buildings
Suburban office space is built outside of the core and typically service parked. These buildings may or may not have elevator service and can be as large as a mid-rise.
Businesses may choose these locations over the downtown core for several reasons:
the location may be more convenient for them and their employees / clients
they don’t have to commute and fight the downtown traffic
and pricing is often more affordable than the core
Similar to garden-style apartments, suburban office can assemble into office parks with several different mid-rise buildings situated in a campus-like setting. Because of this style, suburban office buildings also tend to have a significant amount of green space and amenities.
3. Industrial
Industrial properties widely range in size and use and this asset class has taken off over the last economic cycle thanks to the rise of delivery.
This class certainly has a different feel from the others and isn’t as “polished” or “sexy.” However, industrial can be one of the best real estate assets to invest in thanks to its flexibility and lower cost of entry.
These tenants often tend to stay in their locations for extended periods of time since there are few reasons for them to really relocate.
Bulk Warehouse
Bulk warehouse properties are the largest industrial product and are typically in the 50,000-1,000,000+ square foot range.
Typically 5% to 10% of the overall square footage is dedicated to office area with the remainder housing warehouse space. Bulk warehouses tend to have lower parking ratios than other types of industrial real estate since there are often fewer employees working in this property type and very little to no customer traffic.
These properties are usually regional distribution for various types of products and require strong accessibility for trucks entering and exiting the highway systems.
This type of industrial real estate is ideal for tenants in the logistics and distribution realm that need to ship goods to businesses or consumers - and location is a key factor for them because of the accessibility.
You will also find a concentration of this type of industrial near airports depending on the type of product they are needing to receive and distribute.
Flex Warehouse
As the name implies, flex space is a flexible industrial product that may easily accommodate a wide range of uses.
These warehouses usually have at least some portion of office space connected to the warehouse and can widely range in size to fit your small mom and pop plumber to regional granite distributors and more.
This product is utilized for many different purposes and is often designed to be easily retrofitted to meet any incoming industrial tenant’s needs. Flex spaces often have slightly lower ceiling height than their bulk warehouse counterpart (typically below 21’) and also have a larger portion of office space (upwards of 80%+).
It isn’t uncommon to find overhead loading doors and docks in the flex space environment, but they’re often not as easily accessible as bulk warehousing since an immense amount of load-in and load-out isn’t their primary use.
Heavy Manufacturing
Heavy manufacturing space is often isolated within the most intense industrialized areas of municipalities due to its use of heavy machinery, chemicals, and power necessities.
Think of General Motors and DuPont as tenants for this type of industrial product.
These properties are often heavily customized for the current user and their specific requirements, which can include specialized infrastructure, finishes, and power. In fact, this type of industrial tends to learn towards the retail environment in terms of its customization of space per tenant.
Heavy manufacturing spaces are sometimes build-to-suit properties since the cost to renovate and modify an existing warehouse may be cost-prohibitive.
Light Assembly
Light assembly industrial has a fair amount of crossover with flex space.
Unlike heavy manufacturing, light assembly space isn’t typically utilized to manufacture materials, simply to assemble them and ship them out to distribution centers.
Like flex space, light assembly can also be used for storage and office space (call centers, data centers).
If used on the data center side, light assembly warehouses will need to take power redundancy and internal cooling into account, since the servers and massive amounts of cabling will be utilizing a significant amount of energy and throwing off heat.
Refrigeration / Cold Storage
Cold storage and refrigeration warehousing is exactly what it sounds like: refrigerated warehousing intended to store perishable food and products.
With the rise in consumer demand for fresher food and grocery delivery, cold storage has increased significantly since 2000.
Similar to heavy manufacturing, these spaces are very specialized and build-out intensive, which tends to keep tenant retention on the higher end.
Because of the necessity to freeze and maintain the quality of food, refrigeration and cold storage industrial will often have very specific power needs and foundation requirements, since the cold temperatures can crack concrete slabs.
Showroom
Industrial showrooms are a bit of a hybrid between office, retail, and warehousing.
This product allows manufacturers to showcase their goods in a more retail setting while having back-end office with shipping and distribution, too.
When thinking of showrooms, picture car dealerships and household goods distributors (Home Depot) where they aim to show, sell, and operate from a single location.
Showrooms are often situated along interstates where they can achieve high visibility and easy access for consumers.
Storage
Storage units are an interesting, almost hybrid of industrial and multifamily, which is very attractive for many investors.
These assets can be both outdoor and indoor (climate controlled) and can be rented by tenants to store any number of items, from sentimental family mementos to trailers.
Outdoor units need space to sprawl, so they’re typically located further outside the city while climate controlled is often multi-story with elevator access.
As Americans continue to move into smaller and smaller living spaces, storage unit demand will continue to rise.
4. Retail
Retail real estate is intended to house any business that sells products and services directly to consumers. These projects are typically located to provide the maximum amount of convenience possible to consumers.
While many may say retail is dead, it’s simply shifting thanks to the rise in delivery. Retail is pivoting to offer more entertainment and experiences, which cannot be replaced through online orders.
This real estate asset can range from single, standalone restaurants to massive regional shopping centers.
Community Retail Center
Community retail centers are often found in the range of 150,000-350,000 square feet and have larger trade area.
These shopping centers can have any mix of full-price and discount retailers, depending on which anchors occupy the property. They typically offer a range of apparel and other soft goods.
Community retail centers are usually occupied by one or more big-box retail anchors, such as Kroger, Target, Best Buy, etc. Smaller retailers will fill in the gaps between these larger anchors, hoping to draw in the same shoppers with their convenience.
Outparcel / Single-Tenant Net
Retail outparcels are often standalone, single-tenant pieces of real estate. These projects are often located out in front of larger shopping centers with massive draws or situated at high-traffic corners.
Convenience is king for these operators and they play on the draw of major thoroughfares or other regional retailers.
When thinking of the types of businesses that occupy outparcels or single-tenant net properties, picture Starbucks, Panera, Buffalo Wild Wings, etc.
Power Center
A power center is a shopping center that is very heavily anchored by a major regional retail, such as a Wal-Mart or Bass Pro Shops. These shopping centers are often 300,000+ square feet and located with convenient interstate access.
In addition to their in-line shoppes, power centers typically have multiple out-parcel buildings, intended to provide convenience for the shoppers drawn in by the anchors.
These centers are often traded among institutional buyers due to their sheer size and scale and the tenants tend to be highly credit-worthy.
However, power centers have been heavily impacted by the Amazon effect, which has caused owners to pivot some of their big box vacancies. While it may seem tough to repurpose a big box space, these suites are ideal for churches, entertainment, and fitness uses.
Regional Mall
Regional malls can be both indoor and outdoor and feature more specialty, high-end shoppes along with entertainment and restaurants.
These projects can range from 400,000-2,000,000+ square feet and are also located along major thoroughfares near interstate access.
Malls are often anchored by full-line department stores, such as Dillards or Macy’s, along with a number of smaller specialty tenants. Along with apparel and soft goods, these malls can offer high-end fashion, jewelry, entertainment, and restaurants.
Many of these projects are being repurposed, as well, into more “lifestyle” shopping centers that offer a live, work, play environment.
Strip / Neighborhood Shopping Center
Strip centers are smaller retail properties, often serving as neighborhood retail, that may or may not be large enough for anchor tenants. These centers are intended to provide customers with their day-to-day conveniences.
Neighborhood retail has fared very well over the last economic cycle since it provides local residents with conveniences, such as groceries, pharmaceuticals, restaurants, and entertainment.
These neighborhood shopping centers will typically contain a mix of national, regional, and local small shoppes retail.
5. Hospitality
Hospitality real estate largely exists to serve travelers, both for business and pleasure.
While they can also include entertainment, such as water parks, these projects are often hotels or temporary-stay residences.
These assets can range from your typical drop-in motel to large resorts.
Budget Hotels
Budget hotels can often be found just off interstate exits and are intended to capture drivers in need of a cheap place to stay for the night.
Since this hospitality type is targeted towards economic travelers, the rooms and furnishings tend to be of lower quality with few, if any, amenities.
Budget hotels include Red Roof Inn, La Quinta Inn & Suites, and Motel 6.
Extended-Stay Hotels
Extended stay hotels have larger rooms with small kitchens, intended to serve travelers staying for a week or longer.
These hotels may have smaller amenity packages, such as gyms or pools, to serve the clientele that may be staying for extended periods of time.
Examples of extended-stay hotels include Extended Stay America, Marriott’s Fairfield Inn and Suites, and Homewood Suites.
Full-Service Hotels
Full-service hotels are often located within the central business districts or tourist areas and offer a number of amenities, such as room-service and fitness centers, for travelers.
Resorts are also included in this hospitality type and may have entertainment onsite, such as casinos, amphitheaters, and more.
Examples of full-service hotels include Omni, Hilton, and Marriott.
Limited-Service Hotels
Limited-service hotels don’t typically provide the amenities found in full service hotels and are intended to be an affordable option for the business traveler.
These rooms tend to be of higher-quality than budget hotels but have little to no amenities in order to keep costs lower.
Examples of limited-service hotels include Comfort Inn, Holiday Inn Express, and Hampton Inn.
Short-Term Rentals
Short-term rentals, often found on Airbnb or VRBO, are residential units that operate like a boutique hotel that give travelers a more “local” taste of the city.
Travelers can book private rooms above someone's garage or an entire home.
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About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville. Learn more at www.TylerCauble.com
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