Commercial real estate (CRE) offers some outstanding investment opportunities. But, commercial properties are also extremely diverse. Depending on your financial objectives and unique situation, you can choose to invest in a variety of different property types. As such, to make informed investment decisions, investors must first have a solid understanding of the different types of commercial real estate. 


In the following article, we’ll dive into an overview, advantages, and disadvantages of the six primary commercial property types. Specifically, we’ll cover the following topics: 


  • CRE Type 1: Multi-family / Apartments
  • CRE Type 2: Industrial Space
  • CRE Type 3: Office Space
  • CRE Type 4: Retail  
  • CRE Type 5: Hospitality 
  • CRE Type 6: Medical
  • Final Thoughts


CRE Type 1: Multi-family / Apartments




Broadly speaking, multi-family commercial real estate consists of residential properties with multiple, distinct units. Technically speaking, two- through four-plexes qualify as multi-family. But, from a financing perspective, lenders generally categorize these types as residential real estate. 


Conversely, when apartment buildings have five or more units, they qualify as commercial real estate. As such, investors typically use commercial lending when debt financing these buildings. While not an all-inclusive list, some of the more common types of multi-family properties include:


  • Garden-style apartments
  • Mid-rise apartments
  • High-rise apartments
  • Student housing / dorms
  • Senior and assisted-living   


Investment Pros and Cons


One of the major advantages to multi-family properties is familiarity. Even if people never invested in an apartment complex, they have likely lived in one at some point in time. As a result, an inherent familiarity exists between landlord and tenant. That is, an apartment owner likely understands the needs and general profile of a tenant, which lets these owners better support their tenants.


Furthermore, apartments have a major cash-flow advantage over some other commercial property types. Whereas losing a single industrial tenant could collapse a landlord’s cash flow, it’s not all-or-nothing with multi-family real estate. When you lose a couple residential tenants, the income from the other units helps offset these vacancies. For example, in a 50-unit apartment building, two vacancies likely won’t prevent you from making your monthly mortgage payment. 


But, this advantage to apartment buildings relates directly to the main disadvantage of this commercial property type: high turnover. Many apartments offer month-to-month or yearly leases, meaning tenants come and go frequently. In addition to the vacancy-related costs, these turns also have a direct labor and maintenance cost. When someone moves out, the landlord (or management company) needs to clean and paint the apartment, and they need to market the unit to place a new tenant. These turnover costs can make up a large portion of a building’s operating expenses. 


CRE Type 2: Industrial Space




While multi-family properties have single uses (i.e. as residences), industrial space varies significantly in terms of location, size, and use. Depending on the needs of a particular tenant, this property type may include a bulk storage warehouse near a port facility. Alternatively, a heavy manufacturer may require a large-scale manufacturing facility near particular natural resources. 


Bottom line, far more diversity exists in the industrial property realm, with the major categories including: 


  • Heavy manufacturing
  • Light manufacturing / assembly plants 
  • Bulk warehouses
  • Commercial flex-space (part office, part industrial)
  • Refrigeration / cold-storage warehouses
  • Showrooms (hybrid office, warehouse, and retail)
  • Storage facilities


Investment Pros and Cons


Industrial tenants tend to stay put for a long time, making them extremely reliable. Simply put, the buildout in most industrial buildings tends to be so unique to a particular tenant, little incentive to move exists once a tenant sets up operations. For investors, this creates long-term, reliable rental cash flows. 


Additionally, in terms of macroeconomic shifts, COVID-19 has further accelerated growth in online shopping – and the associated logistics of delivery. This means Amazon and related companies will continue expanding their bulk storage and fulfillment centers, both large-scale hubs and smaller, micro-logistics centers in and around residential areas. The demand for these facilities will increase demand for industrial facilities, providing solid investment opportunities.  


However, the unique nature of most industrial spaces also serves as an inherent drawback to this property type. While tenants tend to stay put for a long time, the buildout required to place a particular tenant can be both expensive and time-consuming. This reality makes changing tenants a challenging process, as the interior layout for one tenant likely doesn’t align with the needs of another. Of note, landlords can mitigate this work with tenant allowances and lease agreements placing the onus on buildout primarily on the tenant. 


CRE Type 3: Office Space




As the name suggests, office space includes the commercial properties tailored towards white-collar businesses. In terms of functionality, an office is largely an office, regardless of the particular building. As a result, instead of sub-categorizing this property type by function, investors break down office properties by 1) age, 2) condition, and 3) location. More precisely, investors use the following system to assess office buildings: Class A (newest, highest-quality, best location), Class B (mid-range), and Class C (oldest, in need of repairs, less desirable location).  

With respect to location, office buildings broadly include the following:

  • Central business district (CBD) properties
  • Commercially zoned houses
  • Suburban office buildings


Investment Pros and Cons


Similar to multi-family properties, most office buildings have multiple tenants. This provides a key advantage to this commercial real estate type; if one tenant vacates an office, the other tenants often shield the landlord from a major cash-flow hit. 


But, office building performance also closely tracks the broader economy. When the economy performs well, occupancy remains high and office property investments perform well. Conversely, in a downturn (or pandemic), office buildings – particularly Class B and Class C – tend to struggle. 


CRE Type 4: Retail  




Retail properties include any spaces designed for tenants who sell products or services directly to consumers. And, due to this business-consumer interaction, most retail properties are located in areas that maximize convenience for consumers. 

Similar to industrial properties, retail spaces include a wide-variety of sizes and layouts, depending on the tenant and its particular speciality. With that said, the primary retail sub-categories include:

  • Community retail centers
  • Outparcel / stand-alone stores (e.g. a chain restaurant located in a mall parking lot)
  • Power / anchor center (anchored by a major regional retailer)
  • Regional malls
  • Strip malls and neighborhood shopping centers


Investment Pros and Cons


Let’s start with the retail “elephant in the room” – the crushing effect online shopping has had on many brick-and-mortar retailers. Despite this reality, many service-focused businesses simply can’t be moved online (e.g. nail salons, gyms, beauty parlors, etc.). This means that, while certain types of retail may no longer make sense from a commercial real estate perspective, the property type remains viable.


Additionally, many retail spaces operate on a “triple-net lease” basis, meaning that the tenants essentially handle all property operations and expenses on their own. For investors, this provides a great approach to passive income. After placing one of these tenants, you largely just sit back and collect rent. 


CRE Type 5: Hospitality 




Hospitality real estate primarily serves the needs of travelers. This can include people traveling for business or pleasure. These sorts of properties range from small inns to massive hotels and everything in between, with major hospitality sub-categories including: 

  • Budget hotels
  • Extended-stay / long-term hotels
  • Full-service hotels
  • Limited-service hotels
  • Properties built specifically as short-term rentals (e.g. AirBnB or VRBO)


Investment Pros and Cons


Even more than office space, hospitality properties tend to very closely mirror the broader economy – for better or worse. This trait represents both an inherent advantage and disadvantage for investors. In strong economies, hospitality investments can have tremendous returns, especially when coupled with the advent of AirBnB and other online services that more effectively link people with available lodgings. But, when the economy suffers or, as we’ve seen recently, health issues curtail travel, investments in hospitality properties perform poorly. 


CRE Type 6: Medical




Finally, we’ll discuss medical properties as a type of commercial real estate. While some investors lump these properties under a broader retail umbrella, their unique characteristics warrant separate discussion. 

While many sub-categories exist, all medical properties share a common purpose – supporting the needs of the medical profession. To that end, common types include:

  • Local doctor and dentist offices
  • In and out-patient surgery centers
  • Urgent care clinics
  • Local hospitals 
  • Major, regional hospitals


Investment Pros and Cons


Investing in medical properties can provide an outstanding counter-cyclical hedge to your portfolio. That is, regardless of economic conditions, people need medical treatment. As a result, while office buildings and retail spaces may suffer in a downturn, medical properties tend to perform well in struggling economies. 

Additionally, similar to industrial tenants, medical tenants require extremely unique and costly buildouts (e.g. lead-lined walls, wide-access elevators, enhanced plumbing systems, etc.). Accordingly, once a medical tenant occupies a space, it will likely stay there for an extended period. Moving just requires too much effort. 

From an investment perspective, developing medical properties requires extremely specialized knowledge and experience. However, for people looking to invest as limited partners or other capital contributors, medical properties offer stable and high returns, making this an outstanding type of commercial real estate. The largest challenge you’ll likely face is finding one of these deals.

Final Thoughts


Investing in commercial real estate can provide outstanding returns. But, before diving into a deal, investors need to first have a solid grasp of the different types of commercial real estate. Armed with the above high-level reviews, new investors can focus their plans, deciding what property type best supports their objectives. 


If you’d like to discuss different real estate investing options for your unique situation, we’d love to chat! Drop us a note, and we’ll set up a meeting to talk about available commercial real estate investment opportunities.