Pros and cons of owning various types of commercial properties

Do you want to invest in commercial real estate, but don’t know what type of property to consider? Here’s a comprehensive guide to the five most common types of commercial properties.

1) Multi-family (apartment buildings) – Multi-family refers to apartment buildings of all sizes. It is classified into garden apartments, apartments without a lift, mid-rise apartments, high-rise apartments, and special purpose housing.

Garden apartments are low-rise apartments with less than 3 stories, built in a garden-like setting. The apartments without elevator are apartments with 4 to 6 floors without elevator. The mid-rise apartments are 4-8 floor apartments with a lift. The skyscrapers are more than 9 floors with at least one elevator. Special purpose housing is a multi-family property that targets a segment of the population, including student housing, senior housing, subsidized housing, etc.

Advantages of multi-family properties:

• Easy access with smaller properties and slow transition to larger properties

• Fiscal benefits

• Use current rents to finance

Cons of multi-family properties:

• Tenant management 24 hours a day, 7 days a week

• Legislation in favor of tenants

• Rent control

2) Industrial – Industrial is normally used to produce, manufacture or store products. Includes warehouses, garages, distribution centers, etc. It is often divided into heavy manufacturing, light assembly, flexible warehouse, and bulk warehouse, depending on the size and use of the property.

Heavy manufacturing often uses machinery heavily and typically requires a substantial amount of renovation before it is rented to another tenant. Light assembly includes storage, product assembly, and office space, which is easier to reconfigure than heavy fabrication. Flexible warehouse typically includes office and industrial space, making it easily convertible space. Bulk warehouses are massive properties, typically 50,000-1,000,000 square feet of space, generally used for regional product distribution.

Advantages of industrial properties:

• Single tenant deal

• Long-term and stable leases

• Relatively small initial investments

Cons of industrial properties:

• Specialization of the area, which makes it difficult to find new occupants.

• Large and extensive reconfiguration expenses

• Higher tax rates, depending on the area

3) Office buildings – This category includes single-tenant properties, small professional office buildings, downtown skyscrapers, and everything in between.

Office buildings are the Central Business District (CBD), which is located in the middle of a city, or suburban office buildings. There are three categories: Class A, Class B, or Class C, which is determined by the quality of the construction and the convenience of the office location.

Advantages of office buildings:

• Less turnover

• Longer lease terms

Cons of office buildings:

• Less frequency to raise rents

• Emphasis on parking

• Expensive financing options

4) Retail / Restaurant – Retail includes shopping centers, community shopping centers, energy centers, regional shopping centers, and outdoor parcels.

Strip centers are small retail properties that may have an anchor tenant, which is a larger, more well-known tenant that will attract small retail tenants. Community retail centers are between 150,000 and 350,000 square feet with multiple anchors, usually supermarkets and drug stores. The energy centers have several smaller retail stores with some retail stores like Wal-Mart, Lowes, Staples, Best Buy, etc. occupying between 30,000-200,000 square feet, containing various parcels. Regional shopping centers are between 400,000 and 2,000,000 square feet with many anchor tenants. Our parcel is land reserved for individual tenants, such as fast food restaurants or banks.

Advantages of retail / restaurant properties:

• Security and profitability of an Absolute Triple Net (NNN) lease

• Less turnover

• Less tenant management

Cons of retail / restaurant properties:

• Less frequency to raise rents

• Depends on the tenant’s performance

• Location and foot traffic are extremely important

• Emphasis on parking

• Visual maintenance

5) Land – The land is self explanatory. It is often classified as new land, fill land, and abandoned land.

Greenfield land is underdeveloped land, such as farms and pastures. Infill lands are vacant lots located in cities that have already been developed. Abandoned land is typically environmentally damaged land that was previously used for other industrial or commercial uses. The land is available for reuse.

Advantages of the land:

• Fiscal benefits

• Less expensive

• More rental possibilities (depends on the location)

Cons of the land:

• No immediate income from tenants

• Few financing options

• Requires development from scratch

The above are the most common types of commercial properties. There are several others that have not been discussed above such as hotels, funeral homes, nursing homes, theaters, etc., which are special purpose type properties.

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