When it comes to commercial real estate (CRE), there is a wide range of property types that cater to various industries and purposes. Understanding the different types of commercial real estate is essential for investors, developers, and tenants alike. In this article, we will explore the main categories of commercial real estate and provide insights into each type.
The multifamily sector encompasses all types of residential real estate outside of single-family homes. It includes apartment buildings, condominiums, co-ops, and townhomes. Within the multifamily category, properties are often classified into different classes, such as Class A, Class B, and Class C.
Apartment rental buildings, in particular, can be further divided into various property types. Freddie Mac, a leading mortgage company, has classified them into six distinct categories:
- High-rise: These are buildings with nine or more floors and at least one elevator. High-rise apartments are often found in urban areas and offer a luxurious living experience.
- Mid-rise: This type of multifamily property consists of multistory buildings with elevators. Mid-rise apartments are typically located in urban areas and offer a mix of convenience and accessibility.
- Garden-style: These are one-, two-, or three-story apartment developments built in a garden-like setting. Garden-style apartments can be found in suburban, rural, or urban locations and may or may not have elevators.
- Walk-up: Walk-up apartments are four- to six-story buildings without elevators. They are often found in densely populated areas and offer a more affordable housing option.
- Manufactured housing community: This refers to communities where operators lease ground sites to owners of manufactured homes. These communities provide an alternative housing solution with a sense of community.
- Special-purpose housing: This category includes multifamily properties that target specific population segments, such as student housing, seniors housing, and subsidized housing for low-income individuals or those with special needs.
The office sector consists of buildings that are primarily used for office space. Office buildings are generally classified into two types: urban or suburban. Urban office buildings are typically located in city centers and include skyscrapers and high-rise properties. They can span several million square feet and accommodate numerous businesses. Suburban office buildings, on the other hand, are smaller in size and are often part of office parks.
Office buildings can be multi-tenanted, with multiple businesses operating within the same building, or single-tenanted, where a single organization occupies the entire building. The industry has established three tiers to rank office buildings:
- Class A Office: These buildings are considered the most prestigious and attract premier office users. They often have above-average rents for the area and boast high-quality finishes, state-of-the-art systems, exceptional accessibility, and a strong market presence.
- Class B Office: Buildings in this category cater to a wide range of users and have average rents for the area. Class B buildings typically have fair to good finishes and adequate systems but do not compete with Class A buildings at the same price point.
- Class C Office: Buildings in the Class C category target tenants in need of functional space at rents below the average for the area. This tier often includes medical office buildings as a specialized sub-sector.
The industrial sector encompasses buildings used for industrial operations and warehousing. Industrial properties are typically located outside of urban areas, often along major transportation routes. These properties can be categorized into four main types:
- Heavy manufacturing: These buildings are highly customized and house machinery manufacturers need to operate and produce goods and services.
- Light assembly: Light assembly buildings are less customized and are primarily used for product assembly or storage purposes.
- Bulk warehouse: These large properties serve as distribution centers and are designed to accommodate the storage and movement of goods on a large scale.
- Flex industrial: Flex industrial properties combine both industrial and office space, allowing for a mix of manufacturing and administrative functions.
- Research and development (R&D) facilities also fall within the industrial category. These specialized properties cater to companies engaged in research, testing, and product development.
Retail properties house a variety of businesses, including stores and restaurants. They can be multi-tenant, with multiple businesses operating within a shopping center, or single-use standalone buildings. The retail sector is diverse, and the type of shopping center can vary based on factors such as size, concept, types of tenants, and trade area.
Single-tenant retail buildings include big-box centers, which are usually occupied by national chains like Target, Walmart, Best Buy, or Dick’s Sporting Goods. Pad sites, which are single-tenant buildings within a shopping center, are often occupied by banks, restaurants, or drug stores.
The retail sector is dynamic and constantly evolving, with changes driven by consumer behavior and market trends.
The hotel sector encompasses establishments that provide accommodations, meals, and other services for travelers and tourists. Hotels can be categorized into several types:
- Limited-service hotels: These hotels do not offer room service, on-site restaurants, or concierge services. They provide basic amenities and are suitable for travelers seeking affordable accommodation.
- Full-service hotels: Full-service hotels provide a range of amenities, including room service and on-site restaurants. They are often associated with large hotel chains and cater to a wide range of travelers.
- Boutique hotels: Boutique hotels are typically located in urban or resort areas. They are known for their unique character, personalized service, and distinct design. Boutique hotels are not part of national chains and often have a smaller number of rooms.
- Casino hotels: These hotels feature a gaming component, such as video poker or slot machines. They provide entertainment and accommodation for guests interested in casino activities.
- Extended-stay hotels: Extended-stay hotels cater to guests who require accommodations for longer durations. They offer limited services but provide fully equipped kitchens and larger rooms to accommodate extended stays.
- Resort hotels: Resort hotels are full-service establishments located in typical resort locations, such as popular vacation destinations or areas with natural attractions. They often feature attached amenities like golf courses, water parks, or amusement facilities.
Mixed-use properties combine multiple types of commercial real estate within a single development. They can include a combination of office, residential/multifamily, retail, and industrial spaces. Mixed-use properties are often found in urban areas, where they contribute to the creation of vibrant communities.
A common example of mixed-use properties is a downtown high-rise building that features retail or restaurants on the ground floor and offices or residences on the upper floors. These properties offer convenience and accessibility, allowing people to live, work, and engage in leisure activities within the same vicinity.
- Land: Land is a fundamental category of commercial real estate. While it is not a building or structure, it holds significant value for potential development. Different types of land exist within the commercial real estate context:
- Greenfield/Agricultural Land: Greenfield land refers to undeveloped land, such as farms or pastures. Within this category, various types of agricultural land can exist, including orchards, animal farms, and ranches.
- Infill Land: Infill land is located in already developed urban areas but is currently vacant. This type of land is associated with the development of real estate in densely populated locations.
- Brownfield Land: Brownfields are parcels of land that were previously used for industrial or commercial purposes but are now available for re-use. These properties may have environmental challenges due to past commercial activities.
- Special Purpose
In addition to the major categories mentioned above, there are numerous other types of commercial real estate that fall under the special purpose classification. Special purpose properties are unique and cater to specific industries or purposes. They may serve as venues for amusement parks, bowling alleys, parking lots, stadiums, theaters, zoos, and much more.
These special purpose properties are often designed and constructed with a specific function in mind, catering to niche markets or specialized activities. For example, an amusement park provides entertainment and recreational activities, while a theater offers a venue for performing arts and cultural events. These properties require specialized knowledge and expertise to operate successfully.
Investing in special purpose properties can offer unique opportunities and potential for high returns. However, they also come with specific challenges, such as the need for specialized management, maintenance, and marketing strategies.
Commercial real estate encompasses a diverse range of property types, each serving different industries and purposes. Understanding the various categories of commercial real estate is crucial for investors, developers, and tenants. Whether it’s multifamily properties, office buildings, industrial spaces, retail establishments, hotels, mixed-use developments, land, or special purpose properties, each category has its own characteristics and considerations.
By comprehending the different types of commercial real estate, stakeholders can make informed decisions, whether they are investing in properties, leasing space for their businesses, or developing new projects. With a solid understanding of the commercial real estate landscape, individuals can navigate the market and capitalize on opportunities in this dynamic and ever-evolving industry.