Office Building, Retail Property, and Industrial Real Estate Investing
Commercial real estate encompasses a variety of different property types, and is one of the largest investment asset classes on the planet. Commercial properties can range from small shops to downtown office buildings & skyscrapers.
The obvious factor that sets commercial real estate apart is that it is owned for-profit by its investor(s). By this definition, many would also categorize 5+ unit apartment buildings as commercial real estate (and even technically 1 – 4 unit rental properties that are non-owner-occupied).
However, since there are many specific factors unique to residential properties not found in business-use commercial properties, for our purposes commercial real estate can be defined as:
Non-residential, business-use real estate.
Specifically, that includes:
3 Main Types of Commercial Properties
a. Office Buildings
Office space is the most common type of commercial real estate, from small 3 – 4 office multi-plexes, to Class A downtown high rises. There are a huge variety of potential issues when it comes to investing in offices, enough so that many books have been written on the topic.
On the upside, they tend to have longer leases with more predictable tenants, especially compared to residential properties. Plus, commercial property leases in general can be more specific in terms (various Net leases), giving both the landlord & tenant more flexibility and options. In good economic times, or with good companies as tenants, there is also the chance for continuously growing needs from single clients.
On the downside, they require a special set of skills & expertise to own, manage, and maintain profitably. The longer leases can leave stepped-up or stepped-down rents lagging market rates. And of course, location is crucial as office space will be significantly affected by changing local economics & employment markets.
Ultimately if you are investing into Commercial Office Real Estate, it’s important to understand it as a specialized asset class, not merely a physical property. It has its pros and cons, but is definitely a worthwhile component of a well diversified portfolio.
b. Retail Property
Retail properties share much in common with office space. Ranging from small, outdated shops in suburban locations to downtown (Central Business District or CBD) storefronts, malls, and major shopping centers.
Similar to office space, retail properties are as secure an asset as the companies that lease it. However, the requirements for a retail property to be successful are not the same as an office, since it is much more dependent on the local consumer market.
Retail properties need to be easily accessible by a high volume of its target demographics. As such, it’s also important for retail tenants to match the local consumer demand with their products & services offered. It’s also important for Retail properties to be well located and maintained to ensure consumers can access the stores & restaurants conveniently without disruption.
Other than Retail’s focus on the Consumer market vs. Office property’s focus on Businesses, the pros and cons of both types of commercial real estate are very similar.
c. Industrial Property
Industrial real estate is one of the most specialized forms of commercial real estate, because it is often literally built to suit one very specific type of business tenant. From more general industrial properties like warehouses & distribution centers, to highly specialized properties like manufacturing or R&D facilities, Industrial real estate encompasses a wide range of specific-use buildings.
Contrary to Retail and Office properties, Industrial real estate is often not necessarily more valuable when located in downtown urban hubs. Rather, Industrial properties are usually more focused on access to logistics (major roadways, ports, train hubs, and airports). They’re also heavily influenced by the type of companies which can lease them.
One of Industrial real estate’s greatest positive attributes is the potential for extremely long-term tenants, spanning decades when circumstances are right. On the other hand, one of the biggest challenges with Industrial properties is that they can be very difficult, if not impossible, to re-tenant without making major changes that require significant investments in construction & renovation.