Breakdown — a guide to commercial real estate assets.

At a Glance —

• It’s important to clearly understand the various asset classes within commercial real estate options
• Different asset classes are in demand at different times, due to varying economic trends
• Understanding the assets classes will help you better understand what types of CRE investments are right for you — both right timed and right for your individual portfolio objectives

Commercial real estate, or ‘CRE’, are properties that are intended for particular business use. CRE is one of the largest asset classes in the US today, covering a variety of use categories. Use categories include retail, office, industrial, multifamily, hospitality and special purpose. Each category contains subcategories or important classifications and distinctions.

When evaluating CRE investments for your portfolio, it’s important to consider a variety of asset classes. The ideal mix is never static. Certain asset classes perform better than others during different economic cycles. The economic trends, matched alongside the goals and objectives of your portfolio, will help you select investments that are right for you.

Let’s explore the various property types within the CRE category to support your evaluation of future CRE investment opportunities.

Retail

Retail properties range from stand-alone buildings and single-tenant buildings to large-scale shopping centers with numerous tenants. Demand within the retail space is driven by geographical consumer spending habits and trends.

Retail properties are generally split into five sub categories:

• Malls — Malls range in size but generally include major department store anchors, inline retail, service, and restaurant tenants
• Community & Neighborhood Centers — These centers include a mix of general merchandise or convenience-oriented tenants and are often “anchored” by a big box retailer or grocery store
• Strip Centers — Strip Centers tend to focus on convenience tenants such as dry cleaners, nail salons, and fast casual food options
• Power Centers — Power Centers are dominated by “big box” retailers with very few smaller tenants
• Lifestyle Centers — The newer generation of open-air lifestyle retail strip centers have begun to replace larger enclosed malls and usually feature upscale apparel and restaurants options

Office

Similar to other commercial property, office buildings come in a variety of shapes and sizes and are generally classified based on height, location, and use.

Office building height categories include —

— Low-Rise: < 7 Stories
— Mid-Rise: 7-25 Stories
— High-Rise: 25+ Stories

There are two location classes —

• Urban — Urban office buildings are located within cities and often include high-rise format
• Suburban — Suburban office buildings are typically situated in less densely populated areas, outside of city centers, and generally are low or mid-rise formats

The final classification is determined by intended use. Demand for general office use space significantly increases in regions dominated by heavy office based businesses like finance and insurance. There are also specialized use requirements, for example, medical offices. Or an office building could be deemed as flex space where a portion of the office building is used for industrial or technology purposes combined with general office space.

Industrial

The industrial sector provides practical and efficient space to businesses that prioritize function over form with a variety of uses typically ranging from manufacturing, storage, distribution or research and development. The demand for this sector depends on the economic necessity — the more consumer spending, the greater need for industrial space.

The industrial sector is separated into three categories —

• Manufacturing — Manufacturing facilities are used for assembly, conversion, or fabrication of raw or partially raw materials into products / goods; classified for heavy or light industrial use
• Storage & Warehouse — Warehouse space is used primarily for storage or distribution of goods or materials. These can include specialty facilities such as cold storage and retail storage
• Flex / R&D — These are industrial buildings designed to give tenants flexibility in how they use the space. These hybrid facilities can be used for testing or research, for example

Multifamily

Multifamily assets account for one of the largest sectors in commercial real estate. With the number of renters increasing in the US, the variety of apartment property offerings continues to expand.

Multifamily properties are residential buildings that include separate housing units for more than one family or groups, contained in a single building or collection of buildings, within a single complex. This asset class includes subcategories like condominiums, townhomes, co-ops and apartment complexes and student housing close to a major college or university campus.

Subclassifications include —

• Low-rise / Garden Style — 2 to 4 stories, situated in a garden-like setting in a suburban, rural or urban area
• Walk-up — 4 to 6 story buildings with no elevator
• Mid-rise — 5 to 9, with an elevator, typically in an urban location
• High-rise — 10+ stories, one or more elevators
• Special purpose — Dedicated housing for select population segments (senior, student and subsidized housing)

Hospitality

The main asset within hospitality are hotels. Hotels give themselves competitive advantages based on their amenities and services provided to their guests. Major flagship brands benefit from worldwide tourism becoming familiar and reputable by providing consistent service across locations.

Subclassifications include —

• Full Service — High-end hotels that provide the highest quality guest services and amenities to be able to charge a premium price
• Limited Service — Properties which are a tier below full service hotels, but often still include the main amenities
• Budget — Budget hotels provide guests with bare minimum services to offer the best possible prices

Special Purpose

While the categories listed above cover most CRE asset types, there are also types which have specific or unique uses making it challenging to place within another category. These properties may have specific layouts, renovations or purposes that limit the property’s use for only its intended purpose. Examples of special-purpose CRE properties include but are not limited to, marinas, sports arenas, funeral homes, stadiums and service centers.

Bottom Line —

While in depth analysis and comprehensive review is required when evaluating any potential CRE investment, having a clear understanding of each asset class and their unique characteristics helps investors to make well informed decisions.