CRE101: The Types of Commercial Properties
Once you’ve decided to invest in commercial real estate, you may need to consider the type of property that is right for you, as each comes with certain upsides as well as unique challenges.
Office Space. Whether it’s a high-rise in the city or a business park in the suburbs, office buildings can be home to multiple tenants or rented to one tenant with larger needs. Many office buildings are build-to-suit and all will be categorized into Class A, B or C. The below definitions of each are provided by The Building Owners and Managers Association International (BOMA):
Class A. Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high-quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.
Class B. Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.
Class C. Buildings competing for tenants requiring functional space at rents below the average for the area.
- Benefits: Because companies don’t want to constantly uproot their businesses, there is generally low turnover and longer leases in office buildings. Keep your tenants happy and you’ll be able to rely on a steady monthly income.
- Potential Challenges: Your income and attractiveness to potential tenants can be largely dependent on things like location and parking. Depending on the types of businesses you lease to, you may need to spend money initially on modifications or improvements.
Retail Space. Retail properties are the buildings that house restaurants and shops. They can vary drastically in size ranging from a space large enough for a major big-box retailer to small spaces for local boutiques.
- Benefits: Provided you do your research and purchase a property with great investment potential and keep up tenant relations, you’ll enjoy low tenant turnover and reliable income.
- Potential Challenges: Acquiring tenants and getting the best rent possible is largely dependent on location, foot traffic, and parking. Retail is one of the first things to suffer in an economic downturn, so you’ll want to ensure you money set aside for emergencies. You’ll also likely spend more on visual upkeep both inside and outside the units since these businesses rely on visiting customers.
Industrial. The Lowcountry is seeing much more industrial space and we have a past post all about investing in this growing market: Should You Invest In Industrial Space in the Lowcountry? Industrial commercial properties are usually located further away from busiest parts of the city but are still convenient for employees and business operations. Industrial facilities can house operations for many types of tenants and include space for manufacturing, warehouse, assembly, and more.
- Benefits: While all investments come with inherent risks, industrial real estate tends to be more recession-proof than other property types. Many industrial leases have reliable tenants and longer leases. They also generally require less hands-on management time and often have lower operating costs.
- Potential Challenges: Because tenants all have unique needs, you may need to invest to build out the space accordingly. This can make it harder to flip for a new tenant down the road.
Multi-family Housing. This segment of commercial real estate includes all types of residential real estate that is not single-family homes including apartments, condos, and townhomes. Similar to office buildings, many multifamily properties are also classified into Class A, B or C.
- Benefits: When managed correctly, multi-family real estate investments consistently generate strong cash flow every month and generally hold long-term value.
- Potential Challenges: Properties that serve as homes to multiple tenants can take a lot of time to manage. They are also subject to stronger regulations than single-family homes and it can be difficult to find a suitable property as the availability is lower than other types of commercial spaces.