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Types of Commercial Properties and Their Characteristics

Types of Commercial Properties and Their Characteristics

Commercial Real Estate Properties can be classified as follows:

  • Office.
  • Industrial and warehouse.
  • Retail and multifamily occupancy units.
  • Hospitality, i.e., hotels and restaurants.
  • Land.

The above types of commercial property are mainly used is to create a low-risk portfolio, taking into account relevant factors such as prime locations, agreed leases, e.g., financially wide-ranging and accountable occupiers, low vacancies, and noble leasing terms.

Offices

Offices form a hefty portion of commercial properties. They are usually maintained by real estate asset businesses that rent office spaces to occupants on varying terms. Such terms could be monthly, quarterly, biannually, or annual tenancy agreements.

The existing lease agreements make it predominantly easy to determine the income associated with office rents. Nevertheless, rents are normally adjusted for inflation. This makes investing in office rental space relatively appealing to many investors.

Investing in office rental space is largely determined by the following factors:

  • Economic state: The economic state greatly determines growth and demand for office spaces. High demand for office rental space has a positive correlation with a high economic growth rate and vice versa.
  • Technology: Technological advancement has revolutionized work. It has led to the emergence of remote work. This, in turn, has led to a decline in the demand for office space.
  • Length of lease: Terms on a lease contract have an overall impact on an investor’s risk-return appetite. On average, lease contracts vary from one country to another. They may be determined by several factors, e.g., attractiveness and location of the office space, financial status of the lessee, future changes in the lease agreements, etc. For instance, a 20-year lease contract can have a five-year fixed rental clause with agreeable annual increments after that. This may make such an arrangement appear attractive to a tenant instead of an agreement that runs for a fewer number of years.  
  • Operating expenses: At the point of signing the tenancy contract, both parties need to be very aware of how to cater for recurrent utility bills. The bills will have a definite consequence on whether a lease agreement will be net or gross. Generally, it is cheaper to operate a net lease than a gross lease as the occupant has the discretion of mitigating recurrent expenses regarding their operations.

Industrial and Warehouse

These include properties such as manufacturing services, research and development units, and distribution outlets.

Returns on investments for industrial and warehouse properties are affected by:

  • State of the economy: Strong economic growth is a good catalyst for manufacturing activities. It increases the demand for the units in question.
  • Import and export businesses: Most import and export businesses have a high demand for mass storage facilities to drive their business ventures.
  • Lease terms: Lease contracts for commercial properties normally run on net leases since the operating expenses are quite hefty.

Retail

This sector includes properties such as shopping malls, supermarkets, etc.

The demand for retail units depends on the following:

  • Purchaser spending behaviours.
  • Economic growth.
  • Employment status.
  • Population growth.
  • Lease contract terms.

Multifamily Occupancy Units

Multifamily occupancy units can take apartments, bungalows, and mansions, constituting a significant proportion of the commercial real estate investment market.

These appeal more to family units as opposed to single occupancy, which again becomes a determining factor alongside the following when investing in such properties:

  • Population demographics: High population growth is a driver for increased demand for rental apartments.
  • Rental vs. homeownership costs: The comparison of rental costs versus ownership costs has an indirect correlation as an increase in home rates affected by interest rates, debt financing costs, etc., may increase the demand for rental units.

Land

Land is one of the commercial properties most sought-after by investors. This is because all the other real estate investments listed above pragmatically depend on it.

Varied investors purchase land mainly for speculative motives, depending on the following factors:

  • Infrastructural improvements: For example, road constructions, social amenity installations, etc., have a favorable impact on land prices.
  • Location: Accessible land can fetch higher prices compared to pieces of land located in remotes areas.  Prices of land in areas that are generally underdeveloped decline rapidly. 

Question

Which of the following is the most speculative as far as real estate investment is concerned?

  1. Raw land.
  2. Warehouses.
  3. Land with infrastructural developments.

Solution

The correct answer is A.

The success of an investment in raw land heavily depends on the development of the land to yield marginal returns. The land is highly likely to appreciate over time.

B is incorrect. Warehouses are rarely speculative since they are characteristically rented, and warehouse rents guarantee imminent income streams.

C is incorrect. Land with amenities indicates a predetermined profitable worth centered on a predictable stream of future cash flows.

Reading 35: Real Estate Investments

LOS 35 (c) Describe commercial property types, including their distinctive investment characteristics.

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