Classifications of Commercial Real Estate

Broadly, commercial real estate can be classified into:

1. Multi-family real estate
Multi-family real estate is housing with multiple units, ideally ensconced within one physical structure. They exist in the space between commercial and residential real estate. They are considered commercial property since owners can look at them to generate income and not primarily to reside in them.
They can be urban or suburban as far as location goes and can be mid-rise or high-rise. Such a property is understood to be a safe investment since, despite the transient nature of residents, a few vacant properties do not impact the profitability of a large apartment building.

2. Office space
Office buildings can also be mid-rise or high-rise and are usually classified into multiple formats. Office leases are typically long term since management does not want to shift its workforce around frequently.
Office space can be premium, as far as location and infrastructure are concerned, they have excellent facility management systems in place. High-rise office buildings in metro city areas fall under this category.
Functional facilities that are professionally managed but lack the characteristics of premium properties are another category of office real estate. They are usually not located in the metro or more urban areas.
Further, certain office space requires extensive renovations or are found at undesirable locations. They are at the bottom rung of commercial office buildings.

3. Retail space
Retail space is obviously considered for a wide range of commercial purposes. From neighborhood stores to large malls and entertainment places, retail space is more expensive than office space due to its proximity to high traffic areas.
Retail leases are also long-term and usually house some anchor tenants, which offer a bigger brand pull. Such brands help in getting more foot traffic.

4. Industrial real estate
Industrial real estate constitutes warehouses, manufacturing hubs, distribution centers, etc., and is usually located outside the periphery of urban or residential areas. Logistic hubs and special economic zones make up clusters of such commercial real estate.

5. Mixed-use spaces
Mixed-use spaces are also popular, especially in urban areas. They can accommodate retail or restaurants at the bottom with office or residential spaces above them.
Also, included in this category are hospitals, nursing homes, and hotels that pay rent or lease the available building space.

Pros of investing in commercial real estate:

• Traditionally provides a strong return on investment, especially in areas of high demand and low inventory
• Offers longer lease terms than residential real estate for greater cash flow stability
• Can provide the benefits of both short-term cash flow through leasing and long-term returns due to capital gains over time
• Provides a more diversified portfolio and may give you more control over ROI
• Spaces like government and healthcare can provide more stability during an economic downturn.

Cons of investing in commercial real estate:

• Buying and selling are lengthy processes, making it less liquid than other investment vehicles
• May require more money upfront, especially if you’re choosing to buy a property outside of a partnership or publicly traded REIT
• Can be highly susceptible to economic downturns, especially retail space and small businesses
• Because different commercial tenants have different space layout needs, tenant turnover can be time-consuming and costly
• Direct investing requires an understanding of commercial real estate laws, regulations, and best practices

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