Commercial real estate can be a sound investment alternative to traditional residential properties. For starters, leases are typically longer and since tenants are running a business from the premises, they are more likely to keep the property in good condition.
However, when it comes to investing in commercial real estate, there are greater barriers to entry compared with residential property. Commercial property can be more complex to understand and manage. Unlike residential properties, there is a wide range of asset classes and each will have its own regulations.
Commercial properties fall into four categories: office, industrial, retail and hotels. These categories then contain multiple subcategories.
So, let’s have a look through some of the different types of commercial real estate.
Commercial offices fall into three classes: A, B and C. The class is determined by the location of the property, the construction quality, the amenities available and the property market around it.
Class A properties, for example, are of high-quality construction, in an easily accessible area with above-average rent and will have high-level amenities, such as a gym. In contrast, a Class C property will be of acceptable construction quality, will have a lower-than-average rent for the area, is unlikely to have many amenities and won’t be easily accessible.
Industrial properties come in a range of sizes depending on their intended purposes.
- Heavy manufacturing
Heavy manufacturing properties are typically larger industrial properties like manufacturing plants or facilities. The facility will be extremely customised to suit the specific needs of the manufacturer and may only be suited to one specific task. There are strict regulations about where this property class can be located as well as environmental regulations.
- Light assembly
These facilities are usually smaller scale than heavy manufacturing facilities. As the name suggests, light assembly or light manufacturing usually takes place.There is usually significant storage space, as well as some office space. Light assembly properties are less customised than heavy manufacturing ones and, therefore, can more easily house a range of tenants.
Warehouse properties are either flex or bulk. Bulk warehouses are larger and typically are regional distribution centres. They need easy truck and transport access and should be close to highways or train lines. Flex warehouses often include some office space and are of a smaller scale.
Retail properties can be quite diverse and their type and location can affect the profitability of the tenant’s business. You can also have look on Why retail property is a good investment
- High street
High street commercial properties are typically single-tenant properties, like cafes and boutiques. They are usually set on a centre shopping street in a suburb, town or city. There are often major anchor tenants nearby (i.e. large chain retailers, like Target or Kmart) that help to draw customers to the area.
- Shopping centre and mall
Shopping centres or malls are multi-tenant properties. Generally shopping centre properties are leased from the centre owners, rather than purchased. Shopping centre or mall properties usually guarantee significant foot traffic and often provide extensive marketing to help drive business. Smaller retailers benefit from a range of large anchor tenants. However, shopping centres have significant leverage when it comes to negotiating leases and have very specific sets of rules of operation.
- Big box
Big box properties are large-scale single tenant properties, usually featuring a well-known retailer requiring a substantial footprint, such as Bunnings or Costco. Besides the warehouse-scale buildings, these properties also tend to offer substantial parking.
There are many different hotel subcategories ranging from boutique hotels through to resort and casino scale properties. These properties are subject to a high level of regulation and compliance, especially around the service of food and alcohol and the provision of gambling.
Boutique hotels are predominantly found in resort or urban areas, alongside full-service hotels, but they will have fewer rooms and not be part of a chain.
- Limited service
Limited-service hotels have fewer amenities than full-service hotels. For instance, they will not offer room service, a restaurant or concierge. They are also usually smaller.
- Full service
These are big-name hotels found in CBDs or resort areas and are generally franchise operators like Hyatt or Hilton. They will have numerous amenities and many rooms available.
- Extended stay
For guests wanting to stay longer than a week, extended-stay hotels have larger rooms and provide kitchen facilities. There may also be some limited services available. These are often serviced apartment buildings and may also include residential leases.
Resort hotels are usually in a tourist location. They may be built on a large amount of land and have additional services alongside the full hotel services, like a golf course or even access to an amusement park. Disneyland, for instance, has a number of resort hotels attached to their Anaheim amusement park.
This is a hotel that has gaming services, like slot machines or poker tables. These are also likely to be big-names and provide full hotel services. Crown Towers Melbourne is one such casino hotel.
The world of commercial property is vast and nuanced. Think about the kind of property you would like to invest in. Is it the right location for the services it provides? Does it have a lot of nearby competition? How does it stand out?
Before you invest, have a look at these 7 tips for smart investment in commercial real estate.