By Gary Richetelli
When most people think “types of commercial real estate,” their minds immediately turn to office space classes. They’re not wrong, exactly: the distinctions between the three major classes of office space—Class A, B, and C—are critical for any commercial real estate investor (not to mention prospective tenant) to understand.
(I actually wrote about office space classes elsewhere on this blog. Check it out if you have time.)
But office space classes don’t tell the whole story.
Commercial Real Estate in All Its Forms
Commercial real estate comes in many different forms. In fact, office space for which the three-tier classification system makes sense is just one small part of the equation. Several other important types of commercial real estate exist. As a current or prospective real estate investor, you need to have a firm understanding of them all.
VTS has a great article on the different types of CRE. It’s highly recommended reading. For now, let’s quickly walk through each type’s features.
Type #1: Multifamily Housing
Many laypeople don’t realize that multifamily housing is a type of commercial real estate. Though any housing other than single-family detached is technically “multifamily,” most zoning codes (and the FHA) lump smaller multifamily structures (duplexes, triplexes, and quadplexes) under the “single-family” umbrella. Following this rubric, multifamily housing can include:
- Co-op housing
- Special-purpose housing (assisted living, 55+, transitional)
- Apartment buildings
- Manufactured housing communities (trailer parks)
These categories can be broken down further still. For instance, apartment buildings are typically categorized as:
- Low-rise (three stories or less)
- Walk-up (4–6 stories, without an elevator)
- Mid-rise (4–9 stories, with an elevator)
- High-rise (nine or more stories, with an elevator)
- Garden (low-rise in a suburban or park-like setting, usually with an interior courtyard or exterior green space on the property itself)
Type #2: Hotel/Hospitality
Hotels, motels, inns, and resorts fall into this category. Though short-term, peer-to-peer rentals (of the sort you’d book on Airbnb or VRBO) are regulated and taxed as hospitality businesses, they occupy a gray area in this classification scheme. Short-term rentals owned and operated by property management companies or hospitality businesses generally are considered commercial real estate. Private rooms and mother-in-law apartments rented out on occasion by individual homeowners typically aren’t.
Per VTS, hotels and hospitality properties can be subdivided into:
- Resorts (large-scale, amenity-rich properties in popular vacation destinations)
- Full-service hotels (large self-contained properties with concierge, front desk staff, porters, restaurants, and possibly retail)
- Boutique hotels (smaller properties with full-service trappings)
- Limited-service hotels (smaller properties without full-service trappings)
- Casinos (full-service hotels or resorts with on-site gaming)
Type #3: Retail
Retail real estate can exist on its own or as part of a larger mixed-use (housing, office, hospitality) development. It takes many different forms:
- Multi-use storefronts (retail on the ground floor, offices or apartments above)
- Strip malls (retail units arrayed around a parking area)
- Enclosed or outdoor shopping malls (larger developments with retail units arrayed around indoor or outdoor pedestrian walkways)
- Big-box retail (large-format stores with a single anchor and possibly a handful of smaller support businesses in “pad” units on the structure’s periphery)
Type #4: Industrial
Industrial real estate doesn’t have to be smoky, smelly, or loud. In fact, light industrial tenants are seen as good neighbors. This type of CRE can be divided into:
- Flex space (low-impact, flexible “maker” spaces that can be used as creative officing or light assembly)
- Light industrial (low-impact assembly and logistics operations)
- Warehouse (larger-scale storage and distribution)
- Heavy industrial (large-format, highly customized processing and assembly facilities)
Type #5: Office
Remember those classes? Here we are. Office space can be:
- Class A (large-format, top-flight amenities and technology, generally new construction or renovated, prime location)
- Class B (mid-aged construction, fewer amenities, good location, potential for value-added updates)
- Class C (smaller-format, minimal amenities, outdated technology, older construction in need of updates)
VTS identifies a sixth type of commercial real estate: “special purpose.” Special purpose properties don’t fall into any of the five relatively neat categories above. That doesn’t mean they’re uncommon; houses of worship, for instance, make up a notable special purpose subtype. But their suitability for rank-and-file commercial real estate investors isn’t always clear.
For the record, common types of special purpose commercial real estate include:
- Tax-exempt houses of worship (churches, mosques, synagogues, temples, and the like)
- Sports and entertainment venues
- Private parks and museums
- Storage facilities, including self storage and auto storage
Which type of commercial real estate looks like a good fit for your investment strategy?