Real Estate

Understanding the Different Types of Commercial Real Estate

Las Vegas Commercial Real Estate offers higher returns than residential property and can be more profitable if properly managed. However, it’s important to understand its risks before investing in it.

One of the biggest differences between residential and commercial properties is that lease terms are typically much longer – often up to ten years. This allows for reliable, stable cash flow.

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Commercial real estate, or CRE, encompasses any property used for business purposes—anything not used as a dwelling, such as an office building rented to white-collar employees, a warehouse full of storage space, or a shopping center filled with stores and restaurants. Private investors or corporations can own commercial real estate, and it generates income for its owners through renting or selling to tenants.

As with all types of real estate, the value and type of commercial property depend on location, demand, and various other factors. For example, an older building in a less desirable neighborhood may be more difficult to sell or rent than a newer building in a thriving area. Moreover, the type of tenant a property attracts will also impact its value and rental or sales price.

Office space is a highly sought-after commercial real estate category because businesses always seek quality infrastructure and visibility to attract new customers. Class A offices are usually brand-new buildings in choice areas of major cities with high-end amenities, top-notch fixtures and systems, and visual appeal. However, they are not cheap and come with hefty price tags that make them unaffordable for most small businesses.

Class B office buildings are slightly older and offer similar benefits to those in Class A but for a lower price point. This category is a good choice for mid-size and larger companies that want to stay within the local market and newer businesses seeking an affordable option.

There’s Class C office space for even lower prices than Class B. These buildings are dated, often have minimal amenities, and are in lesser-demand locations. Nevertheless, they can be a cost-effective option for small businesses that don’t need a premium space or investment properties needing substantial renovation.

Flex spaces, a third office space category, combine industrial and office functions in one property. Essentially, this space is for businesses that require warehouse or distribution services and office space for front-office operations like marketing and accounting.

Retail space is a large segment of commercial real estate occupied by businesses that sell products or services to consumers. This type of commercial space can range from single storefronts to strip malls and shopping centers. Often, shopping centers have anchor stores that drive traffic to other retailers. Retail space can also include big-box warehouses that serve as distribution points for larger retailers, or it may be a single-use, standalone building like a bank or drug store.

With the rise of e-commerce, many businesses have shifted to online sales, but physical retail spaces remain a vital part of the industry. Digital native direct-to-consumer brands like Warby Parker and Everlane have found that their physical stores help them build brand awareness, increase customer acquisition and retention, and boost their sales numbers.

Like office space, retail spaces are leased to tenants for business-related purposes and generate income for the property owner or investor. Because these properties are usually located in highly trafficked commercial areas, they are typically more expensive than residential rental properties.

When looking for retail space, there are several factors that you and your real estate broker must consider. These may include the square footage you need, your budget, and whether you need a parking lot or on-site parking available for customers and employees. You will also want to consider how visible the location is to passers-by and the surrounding area.

If you are considering renting or investing in commercial space, you should familiarize yourself with common terminology, such as NNN (triple net). This refers to the rental rate that includes a landlord’s expenses, such as insurance, taxes, and maintenance. These fees are added to the base rent and passed along to the tenant, so you must ensure you can afford these costs in searching for a new space.

Once you have narrowed your search to a few locations that fit your budget, it’s important to visit the space to see what it is like in person and inspect it carefully. This can help you identify any deal-breakers or must-haves for your retail space, such as the availability of a back-of-the-house, dressing room, or bathroom. It is also helpful to ask if the property is equipped with shelving and merchandising displays.

While commercial real estate, or CRE, includes a variety of property types, industrial properties are arguably the most critical to many businesses. The industrial sector comprises any property used for manufacturing, distribution, assemblage, research, development, or production. It encompasses sites like heavy manufacturing facilities, bulk warehouses, and flex spaces that combine office space with industrial space.

While companies may own the buildings they occupy, the vast majority of industrial real estate is leased. This allows companies to focus on their business operation while leaving the actual building ownership to someone else. As such, leasing industrial space is a much more cost-effective solution for many businesses than buying their building.

In the current market, industrial is the top-performing asset class in CRE, with an average yield of 6.3%. However, investors should note that there is a great deal of variation within individual markets. To maximize returns, investors should research the performance of specific asset classes in their local market and make decisions accordingly.

When evaluating industrial space, it’s important to consider the company’s current and future needs. For instance, if a company grows exceptionally, choosing a smaller space than it needs now can lead to unnecessary costs. It’s also essential to remember that not all industrial spaces are created equal. While one type of industrial space might be well-suited to a heavy manufacturer, another is better suited for a light assembly operation.

In addition to examining the size of an industrial space, it’s important to consider its location. Industrial spaces near transportation hubs, such as freeways or airports, offer greater flexibility for distribution and shipping. This is especially important for tenants who rely on a high volume of freight trucks to transport goods.

Additionally, any industrial property with a substantial amount of office space will likely have higher rent rates than similar assets. This is because offices help to generate income for the property owner by attracting a more desirable tenant base.

A hotel is a type of commercial real estate that offers temporary lodging services to travelers and tourists. Hotels are unique among the commercial property asset classes because they also function as operating businesses that generate income from guests rather than solely on real estate profits. This operational component creates greater risk for the property and can add complexity to an investment strategy. But it also allows hotels to offer several additional benefits that other assets may not provide.

One such benefit is taking advantage of bonus depreciation policies unavailable to other properties. Unlike other types of commercial real estate, a hotel has three distinct tax categories: the building itself, FF&E (furnishings and equipment), and goodwill. Using cost segregation strategies, hotel investors can accelerate the deductions associated with each category and increase after-tax income.

In addition, hotel investments can offer an attractive cash flow yield, especially for those who can optimize occupancy and revenue. Hotels sell rooms by the night, and owners can adjust rates based on market demand.

Finally, hotels are a great way to diversify a portfolio. Although they have a higher risk than other asset classes, the strong current cash flows and potential for capital gains at sale make them appealing.

As a result, hotel transactions have surpassed office and retail sales volume growth in recent months, making this an increasingly popular CRE investment class. Savoy investors are taking advantage of this growth opportunity by acquiring hotel properties and capitalizing on their proven ability to generate high-quality passive income.

As a result, we see hotel investment opportunities across the country. Avistone is focused on growing this industry segment by acquiring and managing multi-tenant flex hotel properties that can generate substantial cash distributions to accredited investors while increasing in-place operating income and maximizing the value of each hotel upon sale. If you are interested in investing in hotel properties, please contact us to learn more about our approach and our existing portfolio.