Types of Commercial Property: Which is Right for Your Portfolio?
If you are investing in real estate, one of the most important decisions you need to make is whether you will add commercial property to your portfolio. Commercial property can add diversity to your overall portfolio, but it’s essential that you understand the various types.
Understanding the different types of commercial properties will help increase the profitability and stability of your property investments.
What Do We Mean By “Commercial Property”?
First, we need to clarify what we mean by commercial property. Commercial property, for the sake of this discussion, is going to be any property that is not used for residential purposes. Basically, if no one permanently lives in the structure (or, at least, it’s not meant for people to live there), it is commercial property. Therefore, hotels, where people often stay for extended periods but don’t really live, is considered commercial property. Apartment buildings, which are sometimes classified as commercial property in lending, will be considered residential property in this discussion and will therefore be left out. This is important because some appraisers, as well as certain loan products, may consider apartments commercial property.
A Closer Look at the Various Types of Commercial Properties
Note: San Diego Purchase Loans is not an investment advisor. This article is for general information only and should not be taken as investment advice. Always speak with a qualified investment professional before making any purchases in commercial property.
This is simply the property that holds the retail outlets and restaurants that people frequent everyday. Owning retail space has many advantages, including an increased potential for a high return on investments, but one of the most popular aspects is the chance for extended leases. Retail businesses tend to stay in one place for longer periods. An office company, for example, is not heavily dependent on where they reside, while restaurants, clothing outlets, and grocery stores need to stay in place so customers know where to find them. With retail property, it’s not uncommon to have leases that last for decades.
Unfortunately, returns from this type of property are highly sensitive to market conditions; if the economy tanks, retail businesses are often the first to shutter operations.
Owning an office building or small office space can bring the potential for consistent returns. There is often a high demand for space where businesses can conduct their operations, including sales, marketing, human resources, and management. A well-organized, clean, and spacious office space can command top-dollar when rented to a reliable tenant.
Office buildings are often separated as suburban or urban; suburban office spaces are often single-story facilities that are spread out over a larger space, while urban office buildings take up a smaller ground space but can include millions of square feet.
There is also a classification of office spaces based on quality, as defined by the Building Owners and Managers Association.
- Class A is the highest-quality and commands rental income higher than the area’s average. They can include refined finishes, advanced technology, and easy access.
- Class B includes office buildings in the mid-tier of quality: they are not exceptional, but they are certainly not ramshackle. These buildings may not bring a high a return, but they are more affordable and tend to have more possible tenants, as the price is not restricting.
- Class C are buildings that offer tenants a functional space with few amenities, decor, or finishes. They are often bare-bone structures (for lack of a better word), and generally bring a lower income on a monthly basis. However, the entry price is lower, making them an option for people with lower budgets who want to purchase an office space.
Usually located outside of urban areas, in suburban, small-town, or rural settings, industrial property is used by a variety of tenants. They are usually categorized by use, starting with heavy manufacturing. With heavy manufacturing, industrial buildings need extensive customization and fitting, allowing a specific company, such as a component manufacturer, to operate. Heavy manufacturing is often typified by the creation of a new item from raw material, such as rubber into tires, metal into panels, or plastics into bottles.
Light manufacturing facilities are not as customized as heavy, and they are often used for the assembly of components to make a final product, not necessarily the creation of something from raw material. For example, light manufacturing might include the assembly of a lawn mower from parts that were created elsewhere.
Flex industrial is essentially a combination of both industrial and office property, so some tenants find it particularly appealing.
Hospitality (Hotels, Resorts, Etc.)
Hotels, motels, resorts, and even spas could all be considered part of the hospitality industry. This type of investment is usually categorized by the amount of services offered. A full-service hotel generally offers everything a guest will need, including restaurants, bars, fitness centers, conference rooms, and spas. A limited service hotel, on the other hand, will essentially offer a roof, a bed, maybe free coffee in the morning, and not much else.
This type of investment requires more dedication on your part, as you are essentially purchasing a hotel that you will either operate or hire a manager to oversee operations on you behalf. With this property, you will rarely have tenants, but will instead be a part of the business.
A warehouse can offer excellent returns on your investment, and they are often available for lower prices compared to industrial properties. One of the aspects that makes warehousing so attractive is the changing economic landscape; with many retailers offering products solely online, they no longer need retail space, but simply need an area where they can store product.
Warehouses, which are generally open space, are also customizable to a specific tenants needs, so they can become whatever your potential tenant desires without having to remove walls, equipment, or fixtures.
Commercial property can also have a highly specific purpose. While they can be rented, they often bring an income from the operation of the property. While we certainly can’t name them all, common special purpose commercial properties include car washes, storage facilities, bowling allies, marinas, and theaters. One defining aspect is that they can’t really be used for anything other than the specific purpose; a car wash can’t be used as office space, a storage lot can’t be used for manufacturing.
Get the Right Loan for Your Commercial-Property Investment
If you want to learn more about investing in commercial property, contact the staff at San Diego Purchase Loans today. We’ll help you choose the right loan to increase the profitability of your real-estate portfolio.