The realm of commercial real estate (CRE) extends far beyond stereotypical office towers and shopping malls. It encompasses a diverse assortment of property types known as asset classes, including multifamily housing, industrial spaces, retail outlets, and more. Each class has its own characteristics and investment opportunities.
This guide will take you through the different types of CRE asset classes, helping you understand their individual dynamics and risks. Let’s get started.
What is a Real Estate Asset Class?
A real estate asset class refers to a group of properties that share similar characteristics.
The properties are generally influenced by related factors, therefore behaving similarly in the investment market.
Asset classes are categorized based on factors such as common attributes, geographic location, and functional use.
In commercial real estate, asset classes include:
- Hotels & hospitality
- Special purpose
It is important to recognize that each asset class plays a unique role within its own market dynamics and may respond differently to economic fluctuations.
No single asset class is universally superior to another.
Each class presents unique investment opportunities and potential risks. The key to successful CRE investment lies in understanding these classes and their peculiarities.
Types of Commercial Real Estate Asset Classes
CRE portfolios often consist of several asset classes. Understanding how each asset class works and the risks involved is important for successful property investment outcomes.
Multifamily properties are designed to accommodate multiple families or tenants in one building. These properties maintain their value irrespective of market conditions. Due to this, they offer a steady income stream.
Subdivisions within multifamily real estate include:
- Garden apartments
- Mid-rise apartments
- High-rise apartments
- Student housing
- Senior and assisted living facilities
Office buildings are commercial spaces used for businesses and professional services. The shift in work habits, such as remote work trends, has influenced office investments considerably.
Office buildings are divided into three categories:
- Class A (high-quality, well-located properties)
- Class B (older but well-maintained properties)
- Class C (basic and functional properties)
Industrial properties cater to manufacturing, warehousing, or distribution businesses.
- Heavy manufacturing
- Light assembly
- Bulk warehouses
- Flex industrial spaces
This asset class can be affected by fluctuations in the manufacturing and distribution industries, such as changes in global trade policies, technological advancements, or shifts in consumer demand patterns.
Retail properties cater to businesses that sell goods and services to consumers.
Categories within this asset class include:
- Strip malls
- Shopping centers
-Community retail centers
- Power centers
- Regional malls
With the rise of e-commerce, the retail industry has had to adapt and innovate. This has presented challenges for some traditional retail spaces. On the other hand, it’s also created new opportunities for retail property owners and investors that have never been seen before.
Those willing to embrace change and reimagine the future of retail spaces will benefit from investing in this asset class.
Hotels & Hospitality
Hotels and hospitality properties offer temporary, serviced accommodation for travelers and guests. Within this sector, you'll find various types of hotels:
- Limited-service establishments offering essential amenities.
- Full-service hotels providing a wide range of services and facilities.
- Extended-stay hotels designed for longer stays.
- Resort hotels offering a luxurious and all-encompassing experience. These are often set in beautiful destinations with recreational activities and amenities.
Land is a high-risk investment because it is heavily tied to the potential for development, which doesn’t always happen. High risk often means higher potential returns, so land is a unique investment opportunity that should be analyzed on a case-by-case basis.
Types of land include agricultural land, infill land, and brownfield land. Each of these types offers different development possibilities such as residential complexes, commercial office blocks, or even renewable energy projects, depending on zoning regulations and demand of the local market.
Mixed-use properties combine two or more different property types within a single development, such as offices, residential and retail. They create diverse and vibrant spaces that serve multiple purposes. Mixed-use developments enhance convenience and ‘liveability’.
Special-purpose properties are specifically designed and built to serve unique and specific functions. Unlike traditional commercial properties, these buildings are tailored to specialized requirements of industries or activities.
- Amusement parks
- Medical facilities
- Government buildings
- Data centers
Due to their specialized nature, these properties may have limited market demand. They also require specific expertise from investors and developers.
Emerging Real Estate Asset Classes
Commercial real estate is continually evolving. Emerging sectors are now gaining significant attention from industry stakeholders. They are shaping the future of CRE. Let's take a closer look at a few of these fast-growing property types.
The self-storage sector has experienced substantial growth and popularity and has become a compelling investment opportunity. What makes self-storage so attractive to investors? Three major advantages set it apart from other property types:
1. Low Operating Costs
Self-storage facilities typically require minimal staffing and day-to-day operational expenses. This results in cost-effective management.
2. Minimal Maintenance Requirements
With sturdy and straightforward building designs, self-storage properties generally have lower maintenance demands. You will experience almost hassle-free ownership.
3. High Demand for Accommodation
Urbanization has changed the way people live and work. Self storage caters to the people who choose to live in smaller places that are well-located, are exploring life as a digital nomad, or are slightly addicted to online shopping. Essentially, these people need secure and convenient places to store their belongings separate from their own home. These lifestyle changes over the years have resulted in a surge in the demand for self-storage spaces. Today, self-storage facilities are a normal and indispensable part of modern living.
The life sciences property category has grown significantly, particularly after the Covid-19 pandemic. These spaces are designed for research, development, and production in various related sectors.
Advancements in life sciences continue to shape the future of healthcare. It makes sense, then, to invest in this category. It offers immense potential for long-term gains.
However, you should still approach life sciences properties with careful consideration. They come with unique challenges related to regulations and specialized infrastructure. There is also the ever-changing nature of the healthcare industry to keep in mind.
A big global trend is the growing demand for sustainability which has given rise to a new asset class, known as green buildings. These buildings are designed to reduce the environmental impact of construction and operation, while also making healthier spaces for people to live and work in.
How Understanding Asset Classes Can Boost Your Investment Strategy
Understanding commercial real estate asset classes is the cornerstone of a successful investment strategy. Each asset class presents unique risk and return profiles, market dynamics, and growth potential.
Analyzing asset classes can help you with three important investment aspects:
- Capitalizing on market trends
- Seizing emerging opportunities
- Diversifying your portfolio for long-term success
Some investors choose to invest in only one commercial real estate asset class. This is certainly wise for beginner investors, as it takes time to learn the dynamics of each asset class. Taking on too much too soon can increase the chances for error. Once you’ve chosen your favorite asset class/es, get to know them inside out, as this deep comprehension will help you to navigate the CRE landscape with confidence.
Final Thoughts on Commercial Real Estate Asset Classes
Commercial real estate is wonderfully diverse and offers many abundant opportunities! Understanding CRE asset classes is vital for making informed investment decisions, positioning you for success. It’s also crucial that you continue to learn about and explore emerging property types, as this is essential for delivering risk-adjusted returns. With knowledge, foresight, and adaptability, the vast domain of CRE investment can be navigated with confidence and profitability.