You’ve come to the right place to learn about commercial real estate through the eyes of your local lender. We’re here to answer all your questions about commercial real estate, the different types of commercial real estate, and the specifics of each. Let’s start with the most basic question: What is commercial real estate? In general, a property is considered commercial if its current or intended use is for a non-individual purpose. If you’re going to live in it, there’s a good chance that it’s not a commercial property.
Types of Commercial Real Estate
- Multifamily
- Industrial
- Office
- Retail
- Hospitality
- Special-Use
- Land
Each type of commercial real estate includes sub-types and classifications based on the property’s location and construction quality. For example, within the office segment, you will hear terms such as flex-office, medical-office, low-rise, high-rise, suburban, central business district (CBD), Class A, Class B, and more.
How can I find out what classification a property is?
You can typically find out key information by doing a quick check into zoning. Fun fact! The first known use of the word “zoning” was in 1912 when a newly constructed building in New York City casted a permanent shadow leaving nearby properties in the dark. This along with the development of factories are just a couple of reasons that led to the first known zoning ordinance in 1916.
We weren’t around back in 1916, but it’s a good bet their internet connection wasn’t all that great. Luckily, these days zoning information can be found with the click of a button. For example, if you do a quick internet search for “Integrated Development Ordinance” you’ll find a host of information regarding property uses within the City of Albuquerque. You can also check out the online zoning maps for City of Albuquerque Zoning Map, Valencia County, Sandoval County, or Santa Fe County Zoning Map for zoning information in a specific area.
Property uses, isn’t that really what we’re talking about here? Each property type exists for the sole purpose of filling a need. If you own a wholesale business, you may have a need for storage space to securely store your inventory. Perhaps, your business does not involve physical inventory. Maybe, you need a location to bake cookies and sell them to customers. In that case, a retail property with good visibility and traffic is just what you’re looking for.
Here are some more in-depth definitions for the seven property types:
Multifamily
A property where more than one family lives–commonly known as apartments. Living in an apartment can be a cost-effective option for a tenant. It also affords them flexibility. Apartment investors benefit from having multiple units under one roof, which can be advantageous from a property management standpoint. Many investors desire to purchase apartments for the purposes of income and growth. Properties that range from 1-4 units are classified as residential whereas 5 units or more is commercial. There are different financing options available for each property type. Reach out to your lender to discuss which option will meet your needs best.
Industrial
There are several types of industrial properties. The most common are warehouses. Some warehouses are designed for regional distribution of products to support businesses like Amazon, for example. You can typically find these properties located along major highways. Small business owners often have unique needs so they seek properties that offer flexibility. Flex-warehouses are a great solution for just that. Flex-warehouses can be built out to have a mix of office and industrial space. What a great solution for a growing business!
The challenge for many growing businesses is locating a property within their budget. Industrial properties have become highly sought after in our current market as they have been experiencing record low vacancy rates and limited supply. The rising cost of construction materials such as lumber and steel have been a growing concern for developers to construct new properties, which has also contributed to low supply. All this to say, that this property type can be challenging to find and expensive to buy. In the near future developers may start building “speculative” properties to meet this increased demand. The term speculative or spec is used to describe a property that is being constructed with no prior commitment from a tenant or buyer.
Office
Office properties are all around us. The simple Merriam-Webster definition is “a place where a particular kind of business is transacted or a service is supplied.”
You’ll find office buildings in your local central business district and in many suburban areas around your city. Your local dentist is likely to be located in a suburban area, hopefully, not too far from home.
Office properties are classified by their construction quality and location. A, B, C, just like your report card when you were in school. “A” is the best. “C” is average. Michael Jordan was once quoted saying, “I didn’t come here to be average.” Just like MJ, investors look to take average office properties and bring them to their highest and best selves (use). And, that makes the whole team (community) better!
Retail
Within the retail segment, you can find shopping malls, strip centers, power centers, and outparcels.
- Shopping malls are typically larger in size with square footage typically exceeding 400,000-SF. In Albuquerque, for example, the two indoor shopping malls exceed 1 million square feet.
- Retail strip centers are smaller properties that typically have a large national tenant that draws traffic to a property that is comprised with several smaller retailers and restaurants. These properties are usually located in high traffic areas.
- Power centers are similar to retail strip centers with a slight difference. These properties have several tenants that are “big box” retailers as opposed to only one.
- You’ll find outparcels in the parking lots of most power centers. Outparcels are also known as pad sites. These are freestanding commercial properties. Most of my favorite fast food spots are located on outparcels.
How has retail performed during COVID-19? The pandemic accelerated a few new trends. Mainly, people have been avoiding contact with others to comply with social distancing requirements. This has created a buzz around home delivery of food, drive-thru, and curbside pickup. Quick serve restaurants (fast-casual) concepts are increasingly becoming the norm. There is a growing demand for both fast and healthy food. We’ll be following these trends post-pandemic but at the time of this writing, it sure does look like this is the direction we’re headed.
Hospitality
Hospitality is simply the act of providing services to guests. Generally, we can distinguish properties in the hospitality segment by the degree of services offered. There are limited-service hotels, full-service hotels, extended stay hotels, and motels. In the hospitality industry, you will frequently hear the term “flag”. A flag is another way of saying hotel brand. For example, Best Western, Wyndham, Hilton, and Marriot are all flags. Wyndham is currently the largest flag. Within the Wyndham flag, there are a number of hotels, such as La Quinta, Days Inn, and Super 8, to name a few.
- Limited-service hotels are generally more cost-effective for travelers than full-service hotels. A limited-service hotel typically does not offer amenities like meeting/convention space, room service, a gym, or an on-site restaurant.
- Full-service hotels offer a full suite of services and amenities to their guests. These properties are generally larger and located in areas where there is a high volume of tourists and business travelers. You can find gyms, on-site restaurants, room service, spas, pools, and much more at full-service hotels.
- Extended stay hotels are designed to meet the needs of guests that desire a quasi-apartment. They usually have kitchens, larger living spaces, and all the furnishings required for a stay longer than a week.
- Motels are typically located along highways. The key characteristic of a motel is an exterior corridor, meaning you enter your room directly from outside. There is no lobby. Motels are generally the most cost-effective option for travelers and have little to no amenities.
Short-term rentals have emerged as a threat to the hospitality industry. Short-term rentals are owned and operated by private owners. They are located all around the world and have limited oversight. Property owners are dependent on favorable online ratings to be successful. Individuals interested in staying in a short-term rental can easily find one online through several popular websites. Short-term rentals are attractive to investors due to their higher income potential compared to long-term rentals. If an investor chooses to convert a long-term rental into a short-term rental, they should be prepared to invest time into ensuring that their guests are completely satisfied with their stay and leave positive reviews online.
Hospitality is a dynamic industry. If you choose to purchase a property within this segment, it is important to find a lender that can help you navigate the nuances involved with financing.
Special-Use
Special-use properties are properties designed to meet the needs of a tenant or property owner that has specialized needs. Some great examples are car washes, churches, and laundromats. Special-use properties can be costly to convert to another use. For this reason, many lenders are not willing to finance special-use properties. A prudent lender will look beyond the property to fully understand their borrower’s financial position and needs. Make sure to have a conversation with your lender before pursuing a purchase involving a special-use property. Trust us, it will save you a lot of time and headaches.
Land
Believe it or not, there are different types of land. If you’re in the land development business, you’re familiar with Greenfield and Brownfield Land. If you’re not a land developer, you may never hear these terms again.
Greenfield land is land that is undeveloped, like a farm. On the other hand, Brownfield land is land that has been used at one point or another for commercial and industrial purposes. Brownfield properties should have extensive environmental due diligence completed before purchase.
Mixed-Use
This one is a bonus category. Some commercial properties have characteristics of more than one property type. For example, properties that have retail space on the first level and apartments on the upper levels are a popular mixed-use option, especially in areas that are highly walkable. Vacant properties that are zoned for mixed-use offer flexibility to owners. This can be beneficial for small business owners.
Is Buying a Commercial Property Right for Me?
There are many things to consider when buying a commercial property. Simplify your life by taking the time to build a working relationship with your lender. Your lender should serve as a partner and ongoing resource for you and your business.
At State Employees Credit Union, we are committed to helping our members succeed financially. We are able to finance a broad range of property types for both investors and owner-users. We will work with you one-on-one to understand your needs and help you achieve your goals.
Gabriel Fernandez is the State ECU Commercial Lending Market Manager for the Albuquerque Metro Area. Gabriel is a New Mexico native and comes to State ECU with extensive experience in commercial real estate lending and portfolio management. He has financed a broad range of property types, such as apartments, warehouses, retail buildings, and more. Gabriel helps growing businesses and investors acquire the resources they need to prosper. Come by and speak with Gabriel about your commercial lending needs and see what he can do for your business. You can also find Gabriel on LinkedIn, by phone at (505) 983-7328, ext. 3604 or send him an email to get in touch.
A New Mexican Perspective
It’s nice that you pointed out how a property is considered commercial if its current or intended use is for a non-individual purpose. I was looking at a list of properties for sale and for rent earlier and I saw a couple of commercial properties, which got me really interested. Commercial real estate is very different from residential ones and it seems there are various types of it now too.