Types of Real Estate Property
Real estate properties offer different uses, and as a result generate revenue in different ways for owners and investors. Each class comes with tradeoffs. Knowing the difference helps you make smarter investment calls.Evaluating your firm’s financial goals and determining which types of projects best align helps ensure positive portfolio outcomes and sets your firm up for positive growth or scalability.
Take a closer look at the 5 main classes of property in commercial real estate, and when each might be suitable for your portfolio.
1. Commercial Property
Commercial properties are buildings designed for businesses and revenue generation, such as Class A office space, retail, and shopping center spaces. The distinction is important, as it will impact zoning policy, lease agreements, and financing options. For developers and investors, commercial properties have a lot of benefits, often netting higher rental income than residential properties, appreciating over time to offer significant capital gains, helping diversify real estate portfolios.
Digital tools make leasing and tenant management faster and easier. With online rent collection, automated lease agreements, and maintenance tracking, property managers save time and improve tenant satisfaction.Digital tools can also help you scale – the more easily property managers can address tenant needs, the easier it will be to add larger scale, higher-density buildings to your portfolio.
2. Residential Property
Residential properties include single-family homes, multi-family properties, and condos, which each offer unique potential as investments. All three types of properties can be a key part of your real estate portfolio, as buildings for people to live in will always be in demand, especially as the United States continues to experience housing shortages. Even so, residential properties are still susceptible to market forces, and developers should conduct thorough due diligence before selecting a project for their portfolio.
Leveraging modern real estate development software can help you improve team alignment and reduce delays on large residential projects. Northspyre boosts efficiency for your entire team across the development lifecycle, from pre-project planning through stabilization. The platform replaces outdated and error-prone spreadsheets and the tedious manual processes needed to manage them with a connected platform that standardizes and automates processes across departments.
3. Industrial Property
Industrial properties, such as warehouses and factories are also a common investment option, often coming with long term leases and low overhead costs. The asset type is likely to remain relevant in the eCommerce era, providing logistics and distribution for online retailers. Industrial assets often come in a few varieties, including:
- Heavy Manufacturing: Large facilities built out with specific machinery and equipment to cater to a manufacturer’s needs, such as factories for auto parts or steel. Heavy manufacturing units are highly specified and can’t easily be occupied by a different tenant.
- Light Manufacturing: Smaller and more adaptable facilities, used for product reconfiguring or based on tenant needs
- Distribution Warehouses: Facilities focused on the flow of goods, often with floor-to-ceiling storage layouts and the ability to accommodate a high volume of product
- Flexible Warehouse Space: Facilities that are multi-use spaces, often with industrial storage or manufacturing capacity as well as office space
The biggest obstacle for industrial asset success are supply chain pressures and long timelines to build out specialized facilities. Technology can play a key role in keeping your industrial projects on track, allowing you to create reliable budgets from the start. Leveraging automation to flag potential bottlenecks or concerns in your budget can prevent your timelines from being derailed, and allow your industrial properties to get to market in a competitive timeframe.
4. Land
Land is an undeveloped opportunity, and as such is among the riskier investments your team can make, as revenue generation becomes reliant on the owner. In order to ensure an investment in land delivers high returns, you’ll need to conduct careful feasibility analysis, secure entitlement, and conduct data driven planning. Historical data can play a key role in your process, as you assess location risk and long term yield on cost. AI-driven budget categorizations can empower your team to extract key insights, compare project budgets to portfolio benchmarks, and lead with data-driven decisions that offer more predictability on high risk endeavors.
5. Mixed-Use Property
Mixed-use properties are an asset class where commercial, residential, or industrial components are blended into one project. Projects with mixed-uses are often found in high-density city environments, to meet consumer desires for community oriented neighborhoods, for optimizing land efficiency, and as a means to mitigate risk for investors by diversifying income streams. The downside of mixed-use properties for your team is an added layer of complexity in the planning and construction process. Being prepared to address additional obstacles is essential to add these buildings to your portfolio.
When phased development and cross-functional stakeholder collaboration are required to execute a complex project, there may be an increased need to centralize project data and boost stakeholder collaboration. Mixed-use properties remain one of the emerging asset classes in CRE, and by leveraging an end-to-end development platform like Northspyre your team will be better equipped to handle the complexity a project of this sort might require. Northspyre allows you to automatically enter data, allowing your team to have access to reliable information in real time and focus on the strategic initiatives that will move your business forward.
The Factors Used to Classify a Commercial Property
The location of a building is the most significant factor in determining its worth. Before any other considerations, investors and tenants want to know where a property is based when assessing its merits. Here are a few considerations developers should look at in determining property classes:
- Location: The status of the local job market, population, urban infrastructure, education system, tax rates, and climate are crucial in determining property classification. Based on these factors or trends, local markets can be on the rise or decline and due diligence is essential
- Age: Age is also an important factor used in commercial building classification. Older buildings tend to have less curb appeal than new assets, with the exception of culturally or architecturally significant local landmarks that shape neighborhood character.
- Condition: Properties with modern, well-maintained exteriors are also graded higher than run-down structures with faded paint and damaged fixtures requiring renovation. Buildings need a quality of maintenance to be considered a desirable Class A property.
- Features: Architectural features like high ceilings, big lobbies, and energy-efficient HVAC systems that make properties habitable play a big role in classes of property in real estate
- Amenities: Properties with onsite amenities that make them comfortable, functional, and accessible contribute to higher property ratings. High-speed internet connectivity, air conditioning, fitness centers, conference rooms, and nearby parking that properties more appealing can boost rental property classes.
- Occupancy: Properties occupied by well-capitalized tenants and residents with good credit are well-regarded because they provide consistent cash flow and high returns. Developers should prioritize finding first-rate tenants to maintain top-tier classification because empty buildings are poor earners.
Property Classes (A, B, and C)
Class A
Class A is the highest-ranked property class in commercial real estate. Only the best living spaces, offices, and facilities receive this grade because they are located in and around thriving business districts in major urban markets. Class A buildings feature beautiful exteriors with modern designs, first-class amenities, and state-of-the-art power and heating systems. In general, Class A buildings have high rents and attract high-earning and reputable tenants, meaning low vacancies and steady cash flow make them good investments. Class A buildings are typically less than 15 years old or have been through a major renovation, though building classifications are often highly localized.
Class B
Class B properties are aging commercial buildings in fair to good condition, with practical designs that were popular decades ago.Typically, these properties aren’t centrally located, need better lighting, and need more modern conveniences and amenities. They also lack features that appeal to contemporary preferences for technology-rich interiors and environment-friendly architecture. Consequently, Class B buildings underperform financially and are riskier investments than Class A properties.
Class C
Lastly, Class C buildings are low-quality properties in undesirable locations that need significant rehabilitation. They feature worn-down, 30-year-old exteriors and need significant building improvements.
Class C properties are less accessible than Class A or B buildings because they aren’t in main transit corridors. As a result, they are far from schools, shopping centers, and tourist attractions. And being disconnected from arts and entertainment districts means they don’t benefit from the economic activity those areas cultivate.
These are broken-down commercial buildings in regions with poor street maintenance and underfunded transport systems.Because of those attributes, Class C properties garner below-market rents, struggle to maintain tenants, and don’t appeal to investors. However, unlike Class B buildings, the properties can become profitable investments if a developer invests in retrofitting to transform the property and it’s in a neighborhood with potential.
Turn Property Knowledge Into Project Power
Developers should familiarize themselves with all the categories in commercial real estate to drive smarter investments and implement positive project execution. Understanding the main types of real estate properties will allow you to be more strategic in the acquisitions phase. Your development team should also be familiar with how these properties are classed, and understanding what qualities will net a Class A rating for your assets. Once your development team is clear on the best projects possible to pursue, due diligence process is essential to further determine project viability.
Leveraging a data-powered real estate platform can also help you strategically grow your portfolio, allowing you to adapt your development strategy based on what’s happening in the market and deliver more predictable outcomes on complex projects. Instead of digging through siloed data or manually running time-consuming monthly reports that might be prone to error, you can compile key project data in a central platform and offer all relevant stakeholders access. Northspyre, an end-to-end development platform, can help your team uncover patterns and establish benchmarks that help you enable cost-saving decisions and make the project lifecycle more predictable.
Book a demo and learn more about how Northspyre can help your team simplify your path to predictable returns.
