Pros and Cons of Owning Various Commercial Property Types

Green Goddess Supply

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

1) Multifamily (Apartment Buildings) – Multifamily refers to apartment buildings of all sizes. It is categorized into garden apartments, walk-up apartments, mid-rise apartments, high-rise apartments, and special-purpose housing.

Garden apartments are low-rise apartments with typically less than 3 stories, built in a garden-like setting. Walk-up apartments are 4-6 story apartments without an elevator. Mid-rise apartments are 4-8 story apartments with an elevator. High-rise are 9+ stories with at least one elevator. Special-purpose housing is a multifamily property that targets a population segment, which includes student housing, senior housing, subsidized housing, etc.

Pros of Multifamily Properties:

• Easy to get into with smaller properties and slowly transition to larger properties

• Tax benefits

• Use rents in place for financing

Cons of Multifamily Properties:

• 24/7 tenant management

• Pro-tenant legislation

• Rent control

2) Industrial – Industrial is typically used for producing, manufacturing, or storing products. It includes warehouses, garages, distribution centers, etc. It is oftentimes separated into heavy manufacturing, light assembly, flex warehouse, and bulk warehouse, depending on the size and use of the property.

Heavy manufacturing oftentimes heavily utilizes machinery and usually requires a substantial amount of renovation before renting to another tenant. Light assembly includes storage, product assembly, and office space, which is easier to reconfigure than heavy manufacturing. Flex warehouse normally includes both industrial and office space, making it an easily convertible space. Bulk warehouse are massive properties, typically 50,000-1,000,000 sq ft space, usually used for regional distribution of products.

Pros of Industrial Properties:

• Deal with single tenant

• Long term and stable leases

• Relatively small initial investments

Cons of Industrial Properties:

• Area specialization, making it harder to find new occupier

• Hefty and extensive reconfiguration expenses

Higher tax rates, depending on area

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

Office buildings are either Central Business District (CBD), which is 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 construction and desirability of the location of the office.

Pros 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 strip centers, community retail centers, power centers, regional malls, and out 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 150,000-350,000 square feet with multiple anchors, usually grocery stores and drug stores. Power centers have several smaller retail stores with a few box retailers such as Wal-Mart, Lowes, Staples, Best Buy, etc. occupying between 30,000-200,000 square feet, containing several out parcels. Regional malls are between 400,000-2,000,000 square feet with a lot of anchor tenants. Out parcel is land set aside for individual tenants such as fast-food restaurants or banks.

Pros 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

• Dependent on tenant performance

• Location and foot traffic is extremely important

• Emphasis on parking

• Visual upkeep

5) Land – Land is fairly self-explanatory. It is often categorized as Greenfield land, Infill land, and Brownfield land.

Greenfield lands are underdeveloped land such as farms and pastures. Infill land is vacant land located in cities that have already been developed. Brownfield lands are usually environmentally impaired land that was previously used for other industrial or commercial use. The land is available for re-use.

Pros of Land:

• Tax benefits

• Less expensive

• More rental possibilities (depend on location)

Cons of Land:

• No immediate income from tenants

• Few financing options

• Requires ground-up development

The above are the most common types of commercial property types. 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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