The commercial real estate industry is known for its potential to generate high returns. Think of those iconic malls, office buildings, and luxurious hotels. But if you’re new to investing, it might seem too expensive to get into.
The good news is that commercial real estate covers a wide range of property types, including warehouses, multifamily, and self-storage facilities. And here’s the cherry on top: there are actually different strategies to dive into these real estate investments, no matter your budget or experience level.
Take it from me: my first venture into commercial real estate was buying a multifamily property. Back then, my husband and I didn’t have much cash, so we leveraged seller financing to get into CRE investing.
My point is, you don’t have to be some real estate tycoon to make commercial real estate work. If you take the time to understand what’s out there and learn different strategies, you’d be surprised at how many options are open to regular investors like you and me.
In this article, I’ll guide you through the different types of commercial real estate and how you can invest in them. My goal is to show the variety across this complex industry so you, as a real estate investor, can better target the right property that matches your strategy and goals.
Commercial real estate (CRE) includes properties used for business purposes, such as generating income from rent or business activities.
Unlike residential real estate, which is always for living spaces, CRE has different property types like offices, retail stores, industrial buildings, multifamily properties, land, and special-purpose properties. Each type has its unique characteristics and considerations for investors.
You can invest in CRE directly by managing properties or indirectly through Real Estate Investment Trusts (REITs), syndications and funds.
Readers support our site. If you purchase through links on our site, I might receive an affiliate commission at no additional cost to you.
What is Commercial Real Estate
Commercial real estate, or CRE, is basically any larger property. Except for multifamily, most of these properties are used for business reasons. A commercial building is designed to make money, either through rent or by hosting business activities.
CRE can be a pretty solid investment. These properties often have longer lease terms, so you can expect a steady flow of income for a longer time.
But it can be a bit tricky sometimes because it usually requires more money upfront, and managing these properties can be more involved. Plus, the market can be sensitive to changes in the economy.
Types of Commercial Real Estate
Commercial real estate properties can provide attractive returns, steady cash flow, and portfolio diversification. However, not all property types are created equal. They all come with unique risks, rewards, and management considerations.
Let’s explore the six main types of commercial real estate.
1. Office Buildings
Office buildings range from towering skyscrapers to small, modest offices. You’ll see them everywhere, not just in the busy downtown areas but also in the quieter parts of the suburbs. They’re also categorized into different asset classes based on their amenities, location, and condition.
Types of Office Building:
Class A Office Buildings: These are the most prestigious commercial buildings with high-quality standards and professional management. They are mostly located in the central business district and have the highest rents.
Class B Office Buildings: Class B buildings are a bit older but still offer functional office spaces. They cater to a wider range of tenants and come with moderate rental rates. Some Class B buildings also have the potential for renovation.
Class C Office Buildings: Class C buildings are the oldest buildings, usually over 20 years old, located in less desirable areas, and in need of maintenance or upgrades. They offer lower rent rates.
Office spaces typically have longer lease terms compared to other commercial properties, often ranging from five to ten years.
Lately, the rise of remote work has been shaking things up, pushing the market towards more flexible, shared office setups. For those looking to invest, it’s crucial to stay on top of market trends, know what tenants want, and adapt to the evolving demands for workspace flexibility and innovative solutions.
2. Retail Property
A retail property is a commercial space where businesses sell products or services directly to consumers. It includes everything from small shops and restaurants to large retail centers like malls and shopping centers. Some properties might be standalone, like a restaurant building, while others are part of larger complexes.
Types of Retail Buildings:
High Street Shops: These are located in urban shopping areas and are highly visible to foot traffic.
Shopping Center: Enclosed spaces with a variety of stores, often anchored by major department stores.
Strip Malls: Open-air retail spaces, usually lined up in a row, often including a mix of small shops and larger chain stores.
Outlet Stores: Typically located outside city centers, offering branded goods at discounted prices.
Specialty Stores: Focus on a specific product category, like electronics or clothing.
Retail stores are heavily influenced by consumer trends, economic conditions, and now, online shopping. As more consumers shift to online shopping, physical stores have seen declining foot traffic and sales.
To stay competitive, many retail store owners are exploring new ways to adapt to the rise of e-commerce.
3. Industrial Real Estate
Although these properties might not boast the glitz and glamour of office buildings or hotels with their grand lobbies, these large, boxy, and plain structures are, in fact, essential to our economy.
They serve various functions, including manufacturing, production, storage, and distribution of a wide range of products. Companies depend on these spaces for the efficient production and shipment of goods on a large scale.
Types of Industrial Properties:
Warehouses: Large, open buildings for storing goods.
Manufacturing Facilities: Factories where products are made. These may have specific requirements like heavy power supply, large floor space, and industrial-grade equipment.
Distribution Centers: These buildings are focused on storing and shipping products efficiently. They are often strategically placed near transport routes like highways and ports.
Flex Buildings: These combine warehouse and office space, catering to businesses that need both.
Data Centers: Specialized facilities for housing servers and computer systems.
Industrial buildings are typically situated outside city centers to allow for more space and better access to transport networks. Their location often prioritizes proximity to highways, railroads, and ports.
4. Multifamily Properties
Multifamily real estate refers to buildings that have more than one housing unit. Although they are residential in nature, they are often categorized as commercial properties when used to generate profit.
Types of Multifamily Buildings:
Apartments: Buildings with multiple rental units. They range from small buildings with a few units to large complexes with hundreds of apartments.
Condos: Similar to apartments, but each unit is individually owned. The common areas and amenities are maintained through association fees.
Townhouses: Multi-floor homes sharing one or two walls with adjacent properties, often with individual entrances.
Duplexes, Triplexes, Quadruplexes: Buildings divided into two, three, or four units, respectively, with separate entrances for each.
Managing hundreds of households in one living complex certainly poses challenges. But despite these, the potential for high profit is significant, especially in cities with rising populations and limited housing availability.
This can include undeveloped land, land for farming, or vacant land for future commercial development. It’s a unique type of investment because it’s all about the potential of what the land could become.
Types of Land:
Undeveloped Land: This is land in its natural state, without any buildings or improvements. It’s a blank canvas for potential development.
Agricultural Land: Used for farming or ranching. Its value depends on factors like soil quality and water availability.
Infill Land: Land in urban areas that’s typically surrounded by developed properties. It’s often used for new construction in established neighborhoods.
When investing in land, several key factors come into play. You have to familiarize yourself with the local zoning laws as they dictate what you can and can’t do with it.
Plus, you need to think about what might be built there in the future, whether for residential, commercial, or mixed-use. And remember, turning a piece of land into something else can take a lot of time and money, so don’t expect to see your cash back right away.
6. Special Purpose
Special Purpose real estate refers to properties designed for a specific, unique use, like churches, amusement parks, hotels, or schools. What makes these properties valuable is how well they serve that specific purpose and whether there’s a demand for that kind of facility in the market.
Examples of Special Purpose Properties:
Educational Facilities: These include schools, universities, and training centers.
Healthcare Facilities: Hospitals, clinics, nursing homes, and medical laboratories fall under this category.
Religious Buildings: Churches, mosques, temples, and other religious gathering places.
Hospitality: Hotels, motels, and resorts are designed for short-term accommodations.
Recreational Facilities: Sports complexes, theaters, and amusement parks.
Investment Opportunities in Commercial Real Estate
After learning about the different commercial property types, you may be wondering how an average investor can actually get involved. There are a couple of main starting points for investing directly or indirectly in commercial real estate.
You can become a landlord in commercial real estate by making a direct investment. As a direct investor, you’re responsible for all aspects of property management, which includes finding and managing tenants, maintaining the property, and handling all financial operations like rent collection and paying property taxes.
And yes, this might sound out of reach for many of us, as these properties sell for millions, after all! However regular investors can also invest directly through creative financing. You may explore seller financing (which I used to buy my first CRE) or personal loans.
Direct investment offers the potential for greater returns, but it also comes with higher risks. This method of investment suits those who have substantial real estate knowledge, the financial capacity for a large investment, and the willingness to actively manage and maintain the property.
Indirect investment means you put your money into funds or companies that own commercial properties. It’s where you invest in real estate without actually buying the property yourself.
A common way to do this is through Real Estate Investment Trust (REIT). REITs are companies that own or finance income-generating commercial properties. By investing in a REIT, you’re essentially buying a share of these properties. It’s similar to buying stocks, and you earn money through dividends.
Another way is through real estate funds, which are like mutual funds for properties. These funds pool money from various investors to buy a portfolio of real estate. It’s a hands-off approach, where professionals manage the properties, and you get a share of the returns.
You can also try co-investing clubs, like SparkRental, as a way to invest in commercial real estate properties as a limited partner of several handpicked syndication deals. This approach allows you to be more than just a silent investor; you also get the chance to learn and understand the details of real estate investing.
Looking For An Easier Way To Invest In Real Estate?
So, while indirect options mean less control over properties, you gain professional management, portfolio diversification, and low buy-in requirements to participate.
Why Invest in Commercial Real Estate Properties?
First, it tends to bring in more consistent and higher rental income compared to residential properties. You also get the benefit of longer lease terms with commercial tenants, which means steady cash flow for a longer period.
There’s also the opportunity to add value to the property through improvements and effective management, which can boost both rental income and the property’s overall value.
Lastly, commercial owners get helpful tax deductions for expenses like their mortgage interest and maintenance costs.
Disadvantages of Investing in Commercial Real Estate
Investing in commercial real estate, while potentially rewarding, also comes with its own set of challenges and disadvantages.
One obvious issue is the higher initial investment it requires compared to residential real estate. Also, managing these properties can be quite complex and time-consuming, especially when dealing with multiple tenants in large buildings like malls or office complexes.
Commercial real estate is also subject to various regulations, including zoning laws, which can be restrictive. And lastly, the success of commercial properties is closely tied to the health of the broader economy and specific industries.
While these challenges don’t completely cancel out the benefits of investing in commercial real estate, they do highlight the need for thorough research, careful planning, and a really good understanding of the market before you dive in.
We’ve witnessed the effects of economic and technological changes in the commercial real estate over the last few years. Office spaces have transformed from cubicles into collaboration hubs, adapting to the rise of the hybrid work setup. Even traditionally reliable warehouses have faced challenges due to the surge of e-commerce.
In light of these changes, it’s clear that adaptability is key in the commercial real estate world. As we look towards the future, an essential factor for investors to consider is how these properties can continue to adapt.
The most valuable properties will likely be those that not only generate big profits but are also well-positioned to evolve with the changing landscape of commercial real estate.
Types of Commercial Real Estate: FAQs
How is commercial real estate different from residential real estate?
Commercial real estate is used for business purposes. They often involves longer leases and larger investments. Residential property, on the other hand, includes homes and small apartment buildings meant for living. The main differences are in their use, financing, and how they respond to economic conditions.
Who helps investors find the right kind of commercial property?
A commercial real estate agent or broker assists investors in finding the right commercial property. They use their expertise in the market and extensive networks to locate properties that meet the investors’ criteria. These professionals guide investors through the process, from property selection to final purchase.
How do lease agreements in commercial real estate work?
Commercial real estate lease agreements set the terms for a business renting a property, including rent amount, lease duration, and who covers expenses like maintenance and taxes. There are different types, such as gross, net, and modified gross leases, each defining cost responsibilities differently.