When most people hear the term “real estate investing,” what usually comes to their minds is residential real estate. However, commercial real estate exists, and it offers several investment opportunities that you might want to consider.
Are you interested in exploring the commercial real estate space? If so, read this article to learn about the various types of investments you can consider in that field.
Types of Commercial Real Estate
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There are four types of commercial real estate: office, industrial, retail, and multifamily rental. Each commercial real estate is usually assigned a class. Properties classified as class A are new and situated in prime locations. These properties come with high-quality designs and finishes. Moreover, they give tenants easy access to amenities like schools, hospitals, and shopping centers. Class B properties, on the other hand, are of good quality, but they are not new. Also, tenants of such properties pay lower rent than those of class A buildings. Class B properties are popular among investors who seek to make some improvements to them and later sell them for a profit. Meanwhile, Class C are typically old buildings developed more than two decades ago. They are less attractive to tenants and require massive renovations to command reasonable rent rates.
Let’s dive deeper into each type of commercial real estate.
Office
This commercial real estate features buildings used for various purposes, like a dentist’s office, a laboratory, and a small distribution facility, among others. The demand for commercial real estate declined massively in 2020 during the COVID-19 pandemic as many businesses opted to operate remotely.
However, leading commercial real estate consultancy agency Commercial Edge reported in December 2023 that the demand for office space was growing. The company added that the vacancy rate had declined to 18%.
Meanwhile, real estate experts at McKinsey have labeled office real estate as a risky investment, arguing that many companies are likely to ditch the brick-and-mortar business model to fully operate remotely in the near future.
Industrial
Properties in industrial real estate are used to host large shipping agencies and manufacturers. The best part about this type of commercial real estate is that the leasing agreements are long-term, making it easy for investors to predict how much they will generate within a specific time.
The biggest downside is that most tenants customize industrial properties to meet their specific needs. Therefore, when the lease ends, investors must make significant renovations to attract new clients.
According to the National Council of Real Estate Investment Fiduciaries, industrial commercial real estate performed better than office properties in 2023. The agency’s recent report showed a 22% increase in demand for industrial spaces last year.
Multifamily Rental
The multifamily rental category features properties like townhouses and apartment buildings, in which tenants stay for the long term. The demand for multifamily rental properties rose 8% in 2023, per data from the National Council of Real Estate Investment Fiduciaries.
Retail
Retail commercial real estate properties are used by businesses that offer goods or services to customers. Supermarkets and restaurants are some of the tenants of retail buildings. Notably, the National Council of Real Estate Investment Fiduciaries reported last December that demand for retail spaces plummeted 1.6% in 2023.
Advantages and Disadvantages of Investing in Commerical Real Estate
Advantages
Consistent Returns: Investors in commercial real estate receive rent payments regularly, thus recording consistent return on investment.
Passive Income: If you contract a property management company to manage your commercial property, then you will earn passively.
Value appreciation: Your commercial property may increase in value over time.
Loan collateralization: You can use your property as collateral to secure funding for other investments.
Disadvantages
High costs: As a solo investor, you will need massive capital to develop a commercial property.
Market fluctuations: If tenants vacate your property, the increased vacancy rate could affect your returns.
Poor property management: Poor landlord-tenant relationships may cause tenants to vacate, thus leading you to lose rental income.