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007. Types of Commercial Real Estate [The 5 You Need to Know]
Episode Transcript
How’s it going everybody - Tyler Cauble here, your host for The Commercial Real Estate Investor Podcast and today we’re going to be breaking down the 5 different types of commercial real estate.
We’re going to cover multifamily, office, industrial, retail, and hospitality, as well as the different product types within each of those categories.
One of my favorite parts about commercial real estate is that there’s a different type of product to fit every kind of investor.
Maybe you prefer the flashy, “sexy” look that comes from high-profile retail investing or maybe you’re more of the rugged, under-the-radar kind of guy, which you’ll find with industrial.
Like I said - either way, there’s a product type for you.
So, let’s jump in and talk about the 5 different types of commercial real estate:
Up first is Multifamily.
Multifamily real estate is simply residential property with more than one unit.
For investors that already own single-family homes or are looking to transition out of the residential world and into commercial real estate, multifamily assets are an easy first step because the tenant base is familiar.
Multifamily investing is also talked about so much more than any other type of commercial real estate, probably because so many investors will have that single-family investing experience already, so you probably already know a bit about it.
Having multiple tenants on a single property allows you to have multiple income streams, which definitely removes a bit of your downside risk from the investment. If one of your tenants moves out of your apartment complex, there’s a pretty good chance that you won’t notice a big hit to your bottom line since you will have other tenants that are still paying rent.
Multi-tenancy can really apply to any commercial property.
The multifamily asset class includes everything from duplexes, which are basically homes divided in two so that they can accommodate two separate tenants, all the way up to large-scale apartment buildings housing hundreds of tenants.
The first subtype of multifamily is your Duplex / Triplex / and Quadplex
So, just like their names imply, duplexes, triplexes, and quadplexes are two, three, and four-unit properties, respectively.
While “plex” properties are considered multifamily assets, since they have multiple units in one building, they actually provide tenants with a more residential / home feel. Each of these units typically has its own entrance and they are similar in size - you won’t usually find one unit taking up the majority of the property, but I guess it could happen.
These units are pretty common in every market across the United States and the buildings could have been originally constructed to accommodate multiple tenants or it’s possible that they were renovated at some point. Some of the floor plans can actually get a little wonky because of that - previous landlords just throw up walls just so they can divide the space and lease to multiple tenants.
According to data from the National Multifamily Housing Council, close to 20% of residential renters live in a plex-type property.
Next we have Garden-style Apartments.
Garden apartments are usually 3 or 4 story walk-ups and will usually have somewhere between 50 to 200 units (or more). These apartments are often found outside of the city core in the suburbs where they can be spread out and offer surface parking.
Units in these complexes are often studio, one-, two-, and three-bedroom apartments and may or may not have patio space and private balconies - which are definitely amenities that tenants love to have.
They’re called garden-style because there is usually a collection of these apartment buildings on single property built in a square with a green space in the center. They may also share amenities such as pools, clubhouses, playgrounds, dog parks, laundry rooms, fitness centers, and more.
Then you’ve got Mid-Rise Apartments.
Mid-rise apartments are usually in the 4 to 11 storey range and will house anywhere from 30 to 100 units or more. These projects are the opposite of garden-style because they’re found closer to the urban core, where a developer can justify the expenses of elevator service and garage-style parking because of the higher rents.
These complexes tend to be newer or recently renovated, since there has been such high demand over the last couple of economic cycles for urban living, and because of that they will usually offer more modern amenities like recording studios, libraries, and dog washing stations - I love seeing how creative investors and developers are getting with their amenity centers.
Demand for mid-rise apartments can be driven by the project’s walkability to local conveniences, like coffee shops and nightlife.
Next, we have High-Rise Apartments.
High-rise apartments are 12+ stories and will usually be home to well over 100 units. These apartment buildings are found within the urban core of larger markets, near the heart of the Central Business District.
Much like mid-rise apartments, these projects are very heavily amenity driven with elevator service, garage-style parking, and sometimes they’ll even offer restaurants and cafes on the ground floor, skydeck pools, and concierge service, and more.
The location is a big driving factor for leasing demand and pricing for units in high-rise apartment complexes because of how convenient they are.
So plexes, garden-style, mid-rises, high-rises - those are your most commonly found types of multifamily, but we also have a couple specialty assets:
Student housing
Student housing, just like the name implies, are projects designed to accommodate college and university students. So, they’re located in close proximity to educational centers and could be owned by an investment group, as well as the universities and colleges, themselves.
Student housing is designed completely opposite of typical multifamily, with the common areas in mind first, which is intended to drive the residents out of their rooms to socialize with their neighbors. In normal apartment housing, the residents expect to have more privacy and a more self-contained living unit.
Although - who knows? Average apartment sizes have been trending downward for quite some time now, so maybe that will begin to shift.
This type of multifamily, as with senior and assisted living, has a very different model than the other products in this asset class and requires specialized knowledge and experience.
Then there’s senior and assisted living.
These multifamily assets are designed to provide housing for seniors - the elderly and aging population. Senior and assisted living facilities are often developed in or nearby neighborhoods that have a preexisting senior population, so that the residents don’t have to move too far and don’t feel like they’ve been removed from their homes.
These projects offer residents a much higher level of support than the other types of multifamily, which can be on-call or in-house medical professionals and nursing staff, housekeeping and laundry, meal services, and more.
Tenants in senior and assisted living facilities may have their own home or private room or can save money by having roommates. These complexes can sometimes have a dedicated wing for memory care patients, as well, who need specialized attention.
Because of all of these services and amenities, senior and assisted living are much higher in price than other multifamily types.
So that’s it for the multifamily section - now for office space.
Similar to multifamily, one of the biggest draws for investors to office properties is the multi-tenancy. Depending on the style of the building and where it’s located, the property can have one to dozens and dozens of tenants.
Office spaces, like multifamily, can be further broken up and classified as Class A, B, and C assets, depending on their age, quality, location, amenities, and more.
Office investing can be fairly capital intensive than other types of commercial real estate, mostly due to the repetitive costs of turning over and building out space for each and every tenant. However, office buildings will have some of the highest values that you’ll see in commercial real estate since the properties are valued on cap rates.
Our first office subtype is the central business district or “CBD” office space.
The central business district is a city’s core district for commerce, so think downtown or uptown office space, and the buildings here are designed to accommodate some of the city’s largest companies - such as your Amazons, Bank of Americas, and so on.
The CBD is characterized by high-density development, often the most density within the city, so these buildings will be mid-rises and high-rises with structured parking and elevator access. Larger companies aim to have naming rights to these buildings when relocating their headquarters, which is why you’ll see their names on top of these structures.
In most American cities, you’ll find the city’s financial district within the CBD, but you’ll also find some of the best entertainment and retail options, too. A number of professional services companies prefer to locate their businesses in the CBD because it’s convenient for their workforce and clients and highly walkable.
Next, we have commercially zoned homes.
Who doesn’t love a good commercial zoned home?
Just like their overly creative name implies, they are formerly residential units, typically older or historic homes, that have been rezoned or repurposed for commercial uses.
They are often a favorite for the smaller, local professional services companies like law firms, accountants, music studios, and others.
These are the businesses that pass on the “corporate” feel that a traditional office building may bring and enjoy the “homeliness” that this type of office space brings.
These spaces will usually feature full kitchens and bathrooms, patios, and fenced in backyards.
And tenants can lease these on a standalone basis, too, so they won’t have to deal with the constant interruptions from other tenants or deal with any co-tenants.
Then there’s medical office spaces.
Medical offices are designed around the needs of medical professionals and, since they’re occupied by medical tenants, can be very valuable and pretty stable investments.
Medical tenants include businesses ranging from your local orthodontist to walk-in clinics and hospitals. Medical tenants spend a massive amount of money on their build-outs - upwards of $200+ per square foot, due to the requirements of their industry and the high-standard of aesthetics.
They often need more plumbing, larger elevators, and other specialized amenities, too, so these leases tend to be 7 to 10+ years since the cost of moving and building out a new space is so high.
You also have suburban office buildings.
Suburban office spaces are built outside of the core, obviously in the suburbs, and are typically surface parked. These buildings may or may not have elevator service and they can be single-story or as large as a mid-rise.
A business may choose to locate in the suburbs instead of the downtown core for several reasons: it may be more convenient for them and their employees / clients, they don’t have to commute and fight the downtown traffic, which seems to be a growing issue everywhere, and the spaces are much more affordable than their CBD counterparts.
Similar to garden-style apartments, suburban office buildings can assemble into office parks with multiple buildings laid out in a campus-like setting. And, because of that, they also tend to have plenty of green space and on-site amenities.
Alright - that’s all we have for office space. Next is a big up and comer: Industrial
Industrial properties range, pretty broadly, in size and use and these assets have exploded in popularity over the last economic cycle thanks to the rise of delivery.
More delivery means more distribution centers and last-mile delivery.
Industrial real estate certainly has a different feel from the other asset types and isn’t as “polished” or “sexy.”
When I first got into commercial real estate, I always thought it was funny when people said that - you know, that each asset class has a different vibe. But it’s so true - it’s like people whose dogs look just like them. You’ll often see office investors wearing suits or slacks and a button down while your industrial guys wear jeans, boots, and flannel.
Anyway - industrial can be one of the best real estate assets that you could invest in considering its flexibility and lower cost of entry.
Industrial tenants have a tendency to stay in their locations for quite some time since they have very few reasons to really relocate.
First up is bulk warehouse.
These are the largest of the industrial stock and are typically in the 50,000 1,000,000+ square foot range.
Around 5% to 10% of the space is dedicated to office, with the rest made up of warehouse. Bulk warehouses will have lower parking ratios than other types of industrial real estate because they have fewer employees per square foot working onsite and very little to no customer traffic.
These sites are often regional distribution centers for various types of products and tenants like to see strong and easy accessibility for their delivery trucks coming to and from the highway systems.
This type of industrial real estate is perfect for tenants in the logistics and distribution realm that need to store and ship goods to businesses or consumers - and location is a very important factor for them because of that accessibility.
This type of industrial product is also found in higher concentrations near major airports, depending on the type of product they are receiving and distributing.
Next up we’ve got flex warehouse space.
Flex space is a flexible industrial product, again - getting creative with these names, that is designed to easily accommodate a wide range of uses.
These warehouses are connected to at least some portion of office space or may even be mostly office space and can be small enough to fit your local mom and pop plumber or large enough to accommodate regional food distributors and more.
Flex is used for many different purposes and is designed to be easily retrofitted to meet the needs of any potential industrial tenants. They will often have slightly lower ceiling heights than their bulk warehousing at around 21’ or below and can sometimes have up to 90% or more office space.
Overhead loading doors and docks aren’t entirely uncommon in the flex space environment, but they’re often not as ideally located or as easily accessible as you could find from bulk warehouses. These buildings just aren’t designed for heavy load-in and load-out but are ideal for tenants that need a good office / warehouse mix.
On the opposite end of the spectrum, you have heavy manufacturing space.
These spaces are located within the most intense industrialized areas of the city or may only be found in the outskirts because of their heavy machinery, toxic chemicals, and power draw.
Large car manufacturing facilities or chemical plants, among others, occupy heavy manufacturing.
These buildings are often heavily customized to the specific requirements of the current tenant, which could be customized infrastructure, finishes, power, and so forth. In fact, this type of industrial is somewhat similar to retail space in the sense that each space is highly customized for the current user.
Because of the need for customization, the buildings in heavy manufacturing are build-to-suit properties since the costs involved in renovating and modifying existing warehouses is probably too expensive.
Then there are light assembly warehouses.
Light assembly is pretty closely related to flex space and could even be considered a combination of flex and bulk warehousing.
Light assembly spaces are typically used to assemble manufacturing materials and ship them to distribution centers, but could also be used as call and data centers.
When used for these purposes, power redundancy and internal cooling are very important, since the servers and massive amounts of cabling will drain a significant amount of energy and create a lot of heat.
Another specialty-type of industrial real estate is refrigeration and cold storage.
This warehousing is just what it sounds like: refrigerated warehousing for storing perishable food and products.
Consumer demand for fresher food and grocery delivery has skyrocketed in the last 20 years, bringing demand for this industrial product with it.
Like the buildings in heavy manufacturing, these spaces are very specialized and can require a large amount of build-out, which means these tenants will usually stay put for a long time.
Refrigeration and cold storage warehousing is very power intensive and requires specialized concrete slabs because the low temperatures can actually crack concrete slabs.
Next, there are industrial showrooms, which are a bit of a hybrid between office, retail, and warehousing.
These buildings allow manufacturers to display their goods in a more retail setting while also having a back-end office with shipping and distribution, too.
When you think of a showroom, picture a car dealership, where they show, sell, and operate their business all from that one single location.
Showrooms will locate along interstates where they can have high visibility and good access for potential customers.
Finally, we have indoor and outdoor storage.
Storage units are basically a hybrid of industrial and multifamily, which many investors find appealing.
These units can be both outdoor and indoor, which is also called climate controlled, and can be rented by tenants to store anything, whether it’s family heirlooms or furniture in between moves.
Outdoor units need space to sprawl, since they’re all ground level, so they’re typically located further outside the city while climate controlled is often multi-story with elevator access.
As living spaces have shrunk in size, storage unit demand has increased.
Our fourth type of commercial real estate is retail.
Businesses that sell products and services directly to consumers will lease and buy this type of real estate. These buildings are located to provide the best access and highest visibility possible for consumers.
While some will say retail that is dead or dying, I believe it’s simply changing because of the rise in delivery. Successful retail centers are beginning to offer more entertainment and experience-type tenants, which can't be replaced through online orders. Well - at least not yet!
These buildings could be as small as a single, standalone restaurant all the way up to a massive regional shopping center.
First up, we have community retail centers, which are on the larger end of retail centers at between 150,000 and 350,000 square feet.
These shopping centers have a wider trade area, since they’re so large, and offer a mix of full-price and discount retailers.
One or more big-box retailers, such as Kroger, Target, or Best Buy, will anchor the shopping center. Small, specialty retailers will fill in the gaps between the larger tenants, hoping to draw in the same customers.
Many of these larger shopping centers will be surrounded by outparcel or single-tenant net retailers.
Picture Starbucks, Chick-fil-A, or Buffalo Wild Wings.
These projects are often located out in front of larger shopping centers with massive draws or situated at high-traffic corners so that they can play off of the large amount of traffic generated by the anchors.
Convenience is super important for these operators.
These outparcels can also be found out front of power centers, which are shopping centers that are heavily anchored by a major regional retailer, such as a Wal-Mart or Cabella’s.
These shopping centers are larger than 300,000+ square feet and located with convenient interstate access.
In addition to the outparcel buildings, power centers typically have multiple in-line shoppes. Essentially, power centers are just larger scale community centers.
Power centers have definitely been impacted by the Amazon effect, which has caused owners to rethink their leasing strategies. It may seem tough to take a big box space and repurpose it, but these suites are actually ideal for churches, entertainment, and fitness uses.
There, there’s the regional mall.
Regional malls can be either indoor or outdoor and have more specialty or high-end shoppes alongside entertainment and restaurant spaces.
These projects can range from 400,000 to over 2,000,000 square feet and may have convenient interstate access or are situated within the city’s urban core.
Here, you’ll find full-line department stores, such as Dillards or Macy’s, along with a number of smaller specialty tenants. Malls offer high-end fashion, jewelry, entertainment, and restaurants in addition to other soft goods.
Older malls are being repurposed or redeveloped into “lifestyle” centers that offer a live, work, play environment.
The most common retail buildings you see daily are strip centers or neighborhood shopping centers.
These are smaller retail properties that might have an anchor tenant but probably aren’t large enough.
Neighborhood retail has actually performed very well over the last economic cycle because the tenants here provide local residents with daily conveniences, such as groceries, pharmaceuticals, restaurants, and entertainment.
They can also contain a mix of national, regional, and small shoppes retail.
Our final category is hospitality.
Hospitality real estate provides housing for business and leisure travelers.
Although entertainment, like theme parks, are included in this category, these projects are often hotels or extended-stay residences.
Hospitality ranges from your typical drop-in motel to private resorts.
First up are budget hotels, which are usually found right off of the interstate exits.
The location is convenient for drivers that just need a cheap place to stay for the night.
These rooms are marketed to the economic traveler, so the rooms and their furnishings tend to be lower quality and the property has few, if any, amenities.
Then there are extended-stay hotels, which will have larger rooms with small kitchens so that they can serve travelers who plan on staying for a week or longer.
They might also have a few amenities, like a gym or a pool.
Next up are full-service hotels, which are often located within the city’s core or areas that are highly trafficked by tourists and they offer many amenities, such as room-service and fitness centers.
High-end resorts are included in this type, which could have larger-scale entertainment onsite, like casinos, concert venues, and more.
On the opposite end of the spectrum are limited-service hotels, which are very similar to full-service hotels except they don’t provide all of the amenities found in full-service projects.
This lack of amenities and services allows limited-service hotels to be an ideal choice for business travelers. The rooms are of higher-quality than budget hotels but have little to no extras, which keeps costs lower.
The final piece of hospitality is short-term rentals.
These spaces are typically rented directly from the property owner through an online platform, such as Airbnb or VRBO. Short-term rentals are residential units that operate similarly to boutique hotels and give travelers a more “local” taste of the city.
Travelers can book a private room above someone's garage or an entire mansion.
So that’s it for our breakdown of the 5 different types of commercial real estate.
If you’d like to take a deeper dive into the world of commercial real estate investing, you can find many different resources on my website: TylerCauble.com, which will be in the show notes, along with links to my YouTube channel and Instagram account.
If you haven’t already, be sure to subscribe to this podcast so that you don’t miss our weekly episodes on investment strategy, leasing & management tips, market updates and more.
And that’s it for this episode - I’ll see you next week!
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
In an upcoming discussion with Jacob Kromhout, my project manager from Bentwood Construction, we'll share the latest construction updates at Salt Ranch, my boutique hotel in East Nashville.