An investment in commercial real estate is the purchase of property or raw land for the purpose of collecting future income stream and/or gain. This asset class may enhance an investment portfolio by providing competitive returns, stability, inflation hedging, and diversification. As a result, commercial real estate has been a significant piece of many institutional investment portfolios. In recent years, individual investors have benefited from real estate investment structures which allow access to more institutional quality properties.
There are six commonly defined sectors of commercial real estate. These categories are office, retail, industrial, multifamily, hotel, and special purpose. Relative risk/reward is dependent on market conditions, strength of current tenants, the likelihood that they will renew their leases at expiration, and whether the lease will be more or less expensive. Each sector behaves differently in relation to these factors.
Investment grade office buildings are typically classified into three tiers that are dependent upon the location, amenities,
and condition of the building. Class A
buildings are of the highest quality, with state-of-the-art amenities and
facilities, as well as having exceptional accessibility. Class A offices generate rents that are above
average Class B buildings are to have
adequate amenities with the condition of the building being good. Class B offices have tenants who are
paying on average the market rate for the space. Class C buildings consist of anything to be considered less than a Class B, with tenants who use the building for its
functionality and pay a below market rate for the space.
Investment retail properties range in size
and scope from a single coffee shop all the way up to malls. The two main types of retail properties are
multi and single tenant properties. A
multi-tenant property can consist of two or more separate buildings like a
strip mall or community shopping center or be a single large building with
multiple independent tenants like a mall.
A single tenant property can be of any size, such as a small diner or a
large big box chain store.
Industrial real estate investments are
generally located outside urban areas, where large areas are available, and
often near major transportation routes.
Industrial real estate can be broken into five smaller subsectors. Heavy manufacturing is a large scale plant or
facility that is a major factory. Light
assembly facilities vary in size, but are generally smaller than heavy
manufacturing facilities, and are used as product assembly or storage locations. Bulk warehouse facilities are used as storage
and/or distribution centers. Flex
industrial facilities contain office and industrial space. The last subsector is research and
development facilities which are highly specialized. Another common occurrence are industrial
parks which are a collection of smaller buildings generally leased out to
multiple independent tenants.
Multifamily properties are defined as being any type of residential that is not a single family residence. The properties are classified similar to office buildings, Class A being the highest and C the lowest. However, multifamily properties are placed into one of six categories by the Federal Home Loan Mortgage Corporation (Freddie Mac) source. The first category refers to all buildings that are high-rises, having nine or more floors with at least one elevator. The next category are mid-rises, all multistory buildings with an elevator in an urban area that are not high rises. The third category is called garden-style, which are one to three story buildings built in a garden like setting. These may be located in suburban, rural, or urban areas and may or may not have an elevator. The fourth category are called walk-ups and are multistoried buildings with no elevator. The fifth category is manufactured housing communities, which are areas where the owner leases sites to individual owners of manufactured homes. The last category is called special purpose housing and generally refers to properties related to student, senior, and low income or subsidized housing.
Hotel properties fall under two main
categories; independent or flagged. An
independent hotel is an unaffiliated privately operated hotel while a flagged
hotel is part of a chain or group of hotels.
Hotels can then be further subdivided into six subcategories; limited
service, full service, boutique, casino, extended stay, or resort. A limited service hotel has no room service,
restaurant, or concierge. A full service
hotel is the opposite and does offer those amenities. A boutique hotel is a type of independent hotel
that is located in an urban or resort area, has full amenities, is not part of
a national chain, and generally has fewer rooms. A casino is a hotel that has some sort of
gaming or gambling component involved with it.
An extended stay hotel will have larger rooms that have fully equipped
kitchens but have limited services available.
Finally a resort has full service, is built on a large allotment of land
built in a resort locale, and has some kind of extra service (for example, a golf
course, water park, or amusement park).
Special purpose properties are properties that are owned by commercial investors but do not fall into one of the above categories. This type of property includes, but is not limited to; independent amusement parks, churches, self-storage, music or concert halls, and sporting stadiums or arenas, or parking garages.