First-time and even seasoned CRE investors look into the property types of commercial real estate before they place capital into it. No matter if you’re into active or passive investing, understanding the four classes of CRE properties is crucial for you to achieve your financial goals.
Before we go deeper into this two-part series of knowing the main types of properties in commercial real estate, let’s look into what CRE is about.
What is Commercial Real Estate (CRE)?
Commercial real estate (CRE) is broadly defined as property acquired mainly for business and to generate active or passive income. This type of investment is classified into 4 primary types of commercial real estate property.
- Industrial space
- Commercial Office space
- Multi-family rental units
As an investor trying to build wealth, understanding these property types is key to knowing what specific investment you’d want to pursue.
Primary Property Types of Commercial Real Estate
1. CRE Industrial Properties
Industrial properties are small buildings or big warehouses that are designed for a rental. These cover a wide range in terms of size and function. Here are some examples:
- Flex/office performs distinct functions such as R&D.
- Light manufacturing produces retail products.
- Food manufacturing produces food and beverages.
- Temperature controlled, such as cold storage.
- Warehouses and fulfillment centers distribute goods to retailers and help support our e-commerce industry.
Further, there are 3 classes of an industrial space:
- Class A properties are newer spaces in prime condition, very desirable locations, and have the most up-to-date amenities.
- Class B is generally older and perhaps could use a facelift; does not have the most modern amenities.
- Class C properties are usually purchased with an eye for renovation or redevelopment.
2. Commercial Office Spaces
There are two major categories under this type of CRE property; urban and suburban.
- Urban office buildings are generally located in densely populated areas with multiple high-rise buildings and skyscrapers. Most often, these are large buildings with over 1 million square feet of office space.
- Suburban office complexes are commonly located in office parks. Unlike the high-rise buildings that dominate city spaces, these are mid-rise buildings with overall lower density.
Aside from being classified based on location, office buildings are ranked based on a 3-tier system.
- Class A buildings are the cream of the crop. Generally, they are new or newly renovated buildings in prime locations with excellent accessibility.
- Class B office buildings have a wider range of tenants to choose from since rents are in an average range. As such, they do not tend to compete with Class A. Most likely, investors target this type of property so they can profit through building improvements. Although they may need some investment outlay, they are usually well managed and in good condition.
- Class C office spaces include older buildings in less prestigious locations. The infrastructure can be dated and they often need a good deal of renovation. The rents are lower to compensate for the deficiencies. Many may be vacant and become opportunities for redevelopment.
In the second part of this blog series, we’ll learn more about retail and multifamily units. Knowing the various types of properties will educate commercial real estate investors like you and help you identify what deals are worthy of your investment.
To successfully sell or buy a CRE property, you need help from trusted partners who have a unique understanding of the market and the industry. Contact the Trajan Team—your partner in success.