Beginner’s Guide to Commercial Real Estate (CRE) – Part 2

Thinking of investing in Commercial Real Estate?  We hope this Guide will assist you in learning more about the 4 Major Asset Classes and Sub-Assets.

Before purchasing or leasing any property, you should ask yourself a few questions:

1. Is the property an investment for your own business, or will you sell or lease it to others?
2. What type of location do you want Destination or Impulse based? (For more info click here.)
3. What Asset Class of property are you looking for?

The “4 Major Asset Classes” are:

1. Office – This class has buildings that range from small professional single and double story buildings, to multi-story towers, and everything in between.

• Office properties are typically defined as having at least 75% of a building’s interior space designed and finished as office space, and are
• Generally distinguished by their height, location, and use.
  • The height classes that have been adopted by the National Association for Industrial and Office Parks (NAIOP), one of the largest CRE industry organizations in the country, are as follows:
    • Low-rise: Less than 7 stories, above ground
    • Mid-rise: Between 7 – 25 stories, above ground
    • High-rise: More than 25 stories, above ground

2. Industrial – This class ranges from manufacturing, research and development, production, maintenance, and storage and/or distribution of goods. It can also include some office space.

• Industrial buildings are divided into 3 Classifications:
  1. Manufacturing – properties tend to have less than 20% office space and can be further classified for a heavy or light industrial use.
  2. Warehouse or Distribution – buildings tend to have less than 15% office space, and may also include specialty facilities, such as cold or freezer storage for food.
  3. Flex/R&D – buildings are designed to provide flexibility in use of the space. They may be referred to as flex or tech space, these buildings are an office-industrial hybrid that can have a 30% to 100% office finish.
• A defining characteristic of industrial space is Clear Height (aka Clearance).
  1. This is the distance from the floor to the lowest-hanging ceiling object: beams, joists or truss work, which descends down into the industrial work area.
  2. It is also the most important measure of the interior height of an industrial building because it defines the minimum height of usable space within the structure.
• Another important characteristic is the number and type of docks a property has for loading or unloading goods without a change in elevation. These can be:
  1. Grade Level, where the parking lot and the warehouse floor are on the same level, to
  2. Semi-dock or half dock height at 2 feet, which is the height of a pickup truck or lower delivery truck, or
  3. Full-dock at 4 feet, which is standard tractor-trailer height.
  4. Some buildings have an industrial spur, which is a type of secondary track used by railroads to allow customers at a location to load and unload railcars.

3. Retail – except for the most densely urban locations, almost all retail tenants require certain minimum parking to square footage ratios in order to lease space. Urban retail spaces, are usually a portion of a mixed-use building rather than a single-use building, and rely heavily upon foot traffic, while other retail subtypes are dependent on traffic and parking, such as:

• Strip centers – Are usually smaller than 30,000 square feet, and rely heavily upon vehicle traffic. A strip shopping center is an attached row of stores or service outlets with onsite parking usually located in front of the stores.  A strip center may be configured in a straight line or may have an “L” or “U” shape. They generally focus on convenience tenants such as dry cleaners, hair and nail salons and smaller restaurants or sandwich shops.
• Community & Neighborhood Centers – These centers might range in size from 30,000 to 400,000 square feet, and include a wide range of apparel, discount retailers and general merchandise stores like Ross, Big Lots, Pay Less Shoes and Dollar Tree; as well as grocery or department stores such as Publix, Kmart, Target and Walmart.
• Malls – Regional malls range in size from about 400,000 to 800,000 square feet and include inline retail, service and restaurant tenants, as well as major department store anchors, such as Dillard’s, Kohl’s and Macy’s.
• Power centers – They typically feature three or more big box retailers such as Best Buy, Home Depot, Target and Walmart, with smaller retailers usually clustered together. Power centers typically have surface parking in the front and merchandise loading areas in the back.
• Lifestyle Centers – Are open-air lifestyle centers that feature upscale apparel and other retailers, along with dining and entertainment. They create their own traffic because the anchor tenants are usually “destination tenants,” such as movie theaters and restaurants.

4. Multifamily – Generally, anything larger than a fourplex [a building that contains four separate apartments] is considered commercial real estate.

• In terms of size, multifamily buildings are often classified as follows:
  1. Low Rise or Garden Style:  2-4 stories high
  2. Mid Rise:  5-9 stories
  3. High Rise:  10 stories or higher

Other CRE Assets Classes include:

• Healthcare
• Leisure
• Land
• Medical Office
• Senior Housing
• Student Housing

Learn more about these Other CRE Asset classes and the ABC Classifications in our next installment of, the Beginner’s Guide to Commercial Real Estate (CRE) – Part 3.