8 Types of Commercial Real Estate PropertyJune 30, 2020 • Author: Howard Taylor
Commercial Real Estate (CRE) is one of the more profitable investment options one can make. CRE properties are income-producing buildings that generate both monthly cash flow as well as building wealth. However, in the current market, borrowers are still feeling impacts of the Coronavirus Pandemic. Lenders are less willing to take on the risk, even if you have steady income and a strong credit record. You may face substantially more scrutiny if you apply for a loan today, especially if your hours are cut because of shutdowns or if your credit is weak. Yet there are sources — namely us at The Griffin Group — who are still funding projects.
So, if you’re in a good position to take on the current market, and you’re contemplating the decision to invest in CRE, the first thing you must understand are the various types of Commercial Real Estate. There are 8 main types of Commercial Real Estate: Multifamily, Office, Retail, Hotel, Mixed-Use, Industrial, Land and Special-Purpose.
Multifamily Real Estate
In order for a property to qualify as a piece of multifamily real estate, it has to have more than one unit of housing, and those units must be totally separate. Multifamily is really defined as anything over 1-4 family. The units can be housed in the same building, or in a full complex. This property type may interest you if you’re looking for shorter lease terms. Stay on top of how the Coronavirus is impacting multifamily rent collection if this is the property type you wish to add to your portfolio.
Prior to COVID-19, office space was one of the more popular types of CRE. These buildings can vary in size anywhere from a single-tenant stand alone building, all the way up to full scale skyscrapers. There are three classes of office buildings: Class A - Newly built or greatly renovated buildings that are in great areas. Usually these are managed by professional real estate management companies.
Class B - Older buildings requiring capital investments of some type. They are well maintained and professionally managed, but require some minor repairs and upgrades. This class is popular among investors.
Class C - Redevelopment opportunities. Most often, these are poorly located. They also require major capital investments to make renovations.
A key factor to consider when investing in office buildings right now, is how the work space is going to change after this pandemic. Many stakeholders are predicting that the office space of tomorrow will not look like the office space of today. This could mean additional bridge loans down the road for renovating pre-pandemic work spaces. Otherwise, you may have difficulty finding tenants if there’s a surge in demand for open concept layouts, healthy buildings or remote work.
Retail buildings are another popular type of Commercial Real Estate. When we say “retail”, this includes anything from strip malls to restaurants to theaters. Retail properties are in urban and suburban areas where they can be patronized the most. These buildings range in size just as office spaces do. The square footage falls around 5,000 square feet to 350,000 square feet.
Malls and other retailers were among the first to be shutdown as the government worked to minimize large gatherings. The New York Times reports that “Retail is without a doubt the hardest hit, as tenants are faced with plunging sales that have led to millions of layoffs”. Many retailers are trying to renegotiate leases, or even resort to non-payment of rent to try and survive the downturn. This property type would surely be one of the most risky investments in the current market.
The Hotel sector is divided into two man categories: Flagged and Unflagged. Flagged hotels have recognizable names and tend to get better rates and terms, and larger appraisal values. They are usually associated with a national chain or franchise. Unflagged hotels are independently operated properties that are not associated to a large franchise. Hotels can then be further categorized into six subcategories; limited service, select service, full service, extended stay, boutique and resort.
Before you buy distressed hotel properties, consider the extraordinary circumstances of the Coronavirus pandemic mentioned in this Globe Street article. The Hotel sector is another asset type within Commercial Real Estate that sustained severe negative impacts by this crisis. Because of ongoing travel restrictions due to the Coronavirus, hotel stocks around the world have dropped significantly in anticipation of increased vacancies and falling room rates.
This property type is great for investors who are struggling to decide between a residential or commercial property to add to their investment portfolio. Mixed-Use infuses commercial development with residential living. This means you could find Office, Hotel and Multifamily all within a single Mixed-Use property. They could be as small as a single building or as expansive as an entire residential community.
Industrial Real Estate
An industrial property would offer the square footage and accessibility necessary for self-storage, warehouses or manufacturing sites. Manufacturers are the entities usually interested in this type of Commercial Real Estate, but Industrial has really become the darling of Commercial Real Estate as a whole. This is a great sector for those interested in investment properties.
While some CRE sectors are negatively impacted by COVID-19, Industrial may actually benefit from the crisis. One example of industrial properties that are thriving include public refrigerated warehouses (used by online grocers) due to the boost in grocery delivery and pick-up. Storage and fulfillment space is also on the rise with companies like Amazon, thanks to the increase in online shopping while brick & mortar stores are closed. Additionally, data centers are booming because of more people working from home and requiring quality web access. Do keep in mind, though, that this boost could be short term. Investors who don’t want to make investments with even the slightest risk should wait to see if the demand will subside as things begin reopening.
One of the best reasons to invest in commercial land is because land is a limited resource. However, buying land is a long-term investment. It may take a long time to see returns on this property type, yet it’s relatively inexpensive compared to the others. Accredited Land Consultant (ALC) Matt Davis with Cushman & Wakefield in San Diego, CA, shared some good news about the development land market. He is seeing minimal impacts of COVID-19 on transitional land, since these properties are less likely to be impacted in the short term. If you’re considering investing in land, he says “there is good news on the longer-term development front”.
Special Purpose CRE Properties
Special Purpose Property is appropriate for a very specific use or for limited use. It will likely have unique construction, including features that limit its purposes to the function for which it was built. Unlike the other types of properties, special purpose CRE properties are ground-up or existing projects. Some examples include gas stations, railroads, bowling allies, car washes, car dealerships, etc.
Before making an investment, review the current economic impacts of the pandemic on that specific property type. Feldman & Feldman recommends these best practices for CRE Investment During COVID-19: purchase assets below replacement costs, look for longer lease periods, choose leases with lower rent escalations, and purchase completed lease assets. You can read about other general suggestions we have for developers by clicking here. If you have any questions about funding your project, reach out to me by phone or email, any time.