Understanding the Different Types of Commercial Real Estate
August 18, 2021
Commercial real estate is a catch-all term that encompasses an extraordinarily wide range of property and facility types. The common factors that unite all commercial real estate is that these are assets that that can potentially generate profit (whether through rent/leasing or through capital gain).
While there are always going to be unique market-specific properties and commercial real estate assets like churches or amusement parks that don’t neatly fall into a specific category, the vast majority of commercial real estate fits into one of the following classifications:
For a commercial real estate firm like Farbman Group, understanding the nuances of each of these different segments is essential. But for those getting started in commercial real estate, or for anyone who would simply like a handy overview of the different property types, here’s what you need to know:
Whether multiple or single-tenant structures, office buildings range from urban high-rises to suburban office parks. There are three tiers of property classifications for office space: Class A, Class B, and Class C. By far the most popular and prevalent type of office in competitive downtown markets and desirable urban and suburban locations is Class A, high-end spaces with high-quality finishes and premium infrastructure.
While different office tenants may have very different perspectives and priorities when it comes to identifying the type of space that works best for them, there is a growing trend that is evident both nationally and here in Detroit for office tenants to gravitate toward unique spaces with distinguishing elements. Repurposed warehouses, industrial facilities or historic high-rises have all found a second-life as renovated homes to unique office spaces. Whether redeveloping or repurposing an existing structure or buildout out a new construction, more flexible and even modular layouts and designs are becoming more popular in the office sector. Flexible or coworking office space is also increasingly desirable. Freelancers, small businesses and start-ups are drawn to the combination of attractive amenities, networking opportunities, flexible usage models and affordable price points that characterize shared or flex office spaces. While urban office and the promise of live-work-and-play dynamism that more downtowns offer has made urban office locations more appealing in recent years, the space, convenience, ample parking and more accessible price points has kept the suburban office market very active.
Retail & Restaurant
The retail category of commercial real estate includes everything from neighborhood and community centers, to larger shopping centers, single- and multi-tenanted stand-alone structures (both big-box and pad sites), and retail components included as part of a larger mixed-use concept. The products, services, dining and entertainment experiences we value as consumers all fall into this category, and a critical mass of retail is almost always essential to creating sustainable mixed-use neighborhoods.
The retail sector has been going through a period of profound change in recent years, with online and mobile competition prompting traditional brick-and-mortar retailers to continue to evolve and find new ways to meet shifting consumer preferences. In a retail landscape where that process has prompted some consolidation and reconfiguring, there is new appreciation for pop-ups, seasonal tenants and non-traditional retailers. Service retail and medical/healthcare retail tenants are on the rise, entertainment concepts and retailers with immersive experiential elements are booming. Retail components are also increasingly integrated as one use among many in larger mixed-use projects and properties.
Healthcare and medical services is one of the fastest-growing commercial real estate segments. With big-picture demographic trends driving rapid expansion in the healthcare industry, the need for high-quality accessible space is higher than ever. Medical real estate includes medical “campuses,” with a number of different (often complementary) medical uses grouped together in a stand-alone location, but it also encompasses a growing healthcare presence in what would traditionally have been considered non-traditional retail environments. While pharmacies have long been a familiar commercial real estate tenant, growing numbers of providers—from doctor and dentist offices, to labs, clinics and other outpatient service facilities—are turning to neighborhood and community centers and other retail developments to find a space that works for them and their patients.
While co-tenancy considerations may require some coordination between larger regional and national healthcare networks and commercial real estate owners and investors, healthcare tenants are generally considered highly desirable by landlords. They tend to be stable, pay competitive rental rates, and have relatively modest parking needs. While medical uses are obviously somewhat different from a dry cleaner or grocery store, their property preferences are familiar to any retailers: access and accessibility, visibility/signage, and maintenance considerations are high on the list.
Industrial structures and facilities are surprisingly diverse. They range from heavy manufacturing and production facilities, to light industrial and assembly, to warehouse, shipping or storage spaces. And while some industrial real estate is located in more populated urban centers (perhaps most notably delivery and distribution centers for online retailers), the majority of industrial uses remain clustered on the outskirts of cities. Access to major transportation hubs and routes is a priority for most industrial tenants, and size, space and logistics/functionality requirements are heavily dependent on the specific tenant/facility.
The hotel and hospitality sector of commercial real estate includes both smaller independent properties and hotels that are part of a larger national chain. Today, iconic national and international hotel brands like Marriott are blurring the line between those two categories by rolling out their own boutique hotel concepts. Hospitality concepts are an increasingly familiar site in mixed-use projects as they (along with multifamily residences) are being recognized not only for their commercial synergies with retail and restaurants, but for their suitability as anchor replacements for department stores and other large tenants in redevelopments and repositioning projects.
Multifamily is another fast-growing commercial real estate segment. From high-rise and mid-rise, to townhomes and community concepts, the multifamily market is diverse and dynamic, with stand-alone developments and projects that are part of larger mixed-use initiatives. Urban multifamily is especially active, with amenity-rich apartment-style residential buildings an appealing destination for a wide range of demographic segments drawn to the activity of vibrant city centers. This segment also includes specialty products like student and senior housing.
Commercially zoned land is a potentially valuable asset. Whether acquired for expansion of existing brands and businesses, as part of a development initiative, or simply as an investment vehicle, identifying and purchasing undeveloped or under-developed commercial property is a process that requires exert guidance and due diligence. Key considerations include zoning issues and deed restrictions, which could potentially impact everything from the size and type of project that can be developed on the site, to signage regulations and operational details like noise levels and waste management guidelines. Site accessibility and site character and topography (including things like soil quality, water sources or flooding issues, easements, and the presence of any underground tanks or other features) are also important to consider—as is the existing utility infrastructure and the cost and complexity of any necessary upgrades.
If there’s one key element that unites all of these different commercial real estate segments, it’s change. Shifts in consumer behavior, the profound (and accelerating) influence of new technology, and the evolving priorities and preferences of owners, investors, and commercial real estate tenants across a diverse range of industries makes identifying and securing the right property (or the right space in the right property) more of a challenge than ever before. Working closely with the experienced commercial real estate experts at Farbman—who are intimately familiar with the segments listed above, and can coordinate those insights with on-the-ground market-specific knowledge—is critically important.
If you’re interested in receiving a complimentary, no-obligation commercial real estate consultation, contact Farbman Group and get in touch with an expert today.
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