As complex and multifaceted as the market for commercial real estate is, we’re here to break it down and simplify it for you.
In this quick guide, we’ll show you:
One leasing structure does not fit all when it comes to commercial real estate.
Single-Net Lease: The tenant pays property taxes on top of their routine rent for space within the building. The landlord will cover other operating costs and expenses (think repairs, maintenance, insurance).
Double-Net Lease: The tenant pays for both property taxes and insurance in addition to their routine rent costs. The landlord covers repairs and maintenance needs. In certain cases, because the tenant is covering more property expenses, the actual rent cost may be lower. This is a common structure in the commercial space.
Triple-Net Lease: The tenant pays rent, taxes, insurance, and maintenance. Naturally, this format is popular with certain investment groups as it can be seen as lower-risk, higher-reward.
Gross Lease: A win for the tenant; in this structure, the tenant only pays rent, and the landlord takes on the remaining expenses.
Commercial real estate is categorized by subtypes depending on varying factors from location to quality to overall aesthetic.
Class A: The best of the best. These properties are in prime locations and are generally top-of-the-line in terms of age, quality, upkeep, infrastructure, and look/design.
Class B: Less competitive on the pricing front than Class A buildings, Class B buildings are slightly older and often may need some reno and repair (which make them popular selections for investment).
Class C: Class C buildings are typically over twenty years old, in less desired locations, and are in need of serious repair.
What is an asset class? It’s a category of investments that are grouped depending on potential performance. Different classes may perform differently depending on what that class is, certain risk factors, subtypes of property, and more.
Generally, asset classes for commercial real estate are:
Office: Office buildings, corporate space, and medical offices are all part of the office asset class. While we still see a need for such spaces, the shift toward WFH and remote roles may continue to impact this in years to come.
Retail: Shopping centers, malls, retail shops, and stores are part of the retail asset class. While this class was once a consistent drumbeat for investment, economic shifts such as the rise of e-commerce and COVID restrictions are things to consider.
Industrial: Warehouses, processing plants, cold storage, manufacturing, industrial buildings, and distribution centers are all part of the industrial asset class. Lots of space is needed for these, and while trade changes may impact industrial properties slightly, remember that traditionally, the need for manufacturing of certain goods remains consistent.
Hospitality: Hotels are the primary example of the hospitality asset class. While plenty of return is possible for these types of properties, important factors such as location and travel trends should be taken into consideration.
Multifamily: Residential units not owned by residences (so apartment buildings, student housing, senior communities, etc.) belong to the multifamily asset class. The largest class within the commercial umbrella, this provides consistent, expectant income.
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