To help manage the colossal scope of commercial real estate, brokers and investors have split it into five broad categories. Below, I’ll talk about what these different categories include and what to look for when investing in them.
Office buildings range in size from the small suburban office parks to the towering skyscrapers in downtown New York City. To help differentiate between them, the category is broken down further into Class A, Class B and Class C buildings.
Class A is the premiere, cream-of-the-crop office building. They usually include high quality designs, a coveted location and above-average rent.
Class B is the average, everyday office building. They compete for a wide range of tenants and have a reasonable rent for the market.
Finally, Class C buildings are beginning to show their wear. They offer functional, if outdated, workspaces at below average rents.
Office real estate is influenced by factors like the local economy and the region’s industry focus – financial and technology companies demand a lot of space. The leasing companies may require special clauses in their contracts like the right to contiguous space.
Industrial buildings are usually located outside of urban areas and along transportation routes. They are separated into four different classes: heavy manufacturing, light assembly, bulk warehouses, and flex industrial (a mix of industrial and office spaces.)
Manufacturing buildings are often outfitted specifically to a single tenant and may require extensive remodeling if a new one moves in. Warehouse are more generic and can be filled fairly quickly should your current tenant move out. Industrial buildings tend to have long leases meaning, over time, rent may fall behind the market.
Before purchasing retail real estate, it’s important to consider its location and the state of the local economy. Both of these will play a big role in the success of your investment. As with industrial buildings, retail spaces generally have long leases that may fall behind current market rent prices, and new tenants may require extensive remodeling to keep with their brand identity.
MultiFamily units are considered one of the safer bets in commercial real estate investment. A single vacancy in large buildings is unlikely to have a heavy effect on income and leases are short enough (1 -2 years) that you can react quickly to changing market prices for rent.
Finally, special purpose buildings include everything else not mentioned about. Amusement parks, hospitals, storage units, hotels and more all fall into this category, and each type requires a unique approach.