Types of Commercial Real Estate Properties

Why This Matters

Commercial real estate (CRE) isn't just about buildings—it's about understanding how different property types generate income, respond to economic cycles, and fit into investment portfolios. When you're analyzing CRE investments, you need to recognize that each property type has distinct lease structures, tenant profiles, capital requirements, and risk-return characteristics. These differences directly impact how you'll approach valuation, financing, and due diligence.

You're being tested on your ability to match property types to their appropriate investment strategies, understand cap rate variations across sectors, lease term implications, and demand drivers specific to each asset class. Don't just memorize what each property type is—know what makes it tick financially, how it behaves in different market conditions, and why an investor might choose one over another.

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Tenant-Driven Income Properties

These property types derive their value primarily from the creditworthiness and stability of their tenants. The longer the lease term and stronger the tenant, the more bond-like the income stream.

Office Buildings

• Classified as Class A, B, or C—this hierarchy reflects building quality, amenities, and location, directly impacting achievable rental rates and tenant retention
• Lease terms typically range 5-10 years with annual escalations, providing predictable cash flows but exposure to re-leasing risk at expiration
• Location and accessibility drive demand—proximity to transit, parking ratios, and neighborhood amenities increasingly matter for talent-focused tenants

Medical Office Buildings

• Healthcare tenants provide recession-resistant income—medical practices rarely relocate due to patient relationships and specialized buildouts
• Tenant improvement costs are significantly higher than standard office due to plumbing, electrical, and compliance requirements for medical equipment
• Proximity to hospitals creates referral networks—buildings within hospital campuses or medical corridors command premium rents

Data Centers

• Triple-net leases with credit tenants make these quasi-bond investments with predictable long-term income streams
• Power infrastructure is the primary value driver—measured in megawatts of capacity, with redundant systems commanding premiums
• Location requirements include low disaster risk and proximity to fiber networks; secondary markets often preferred for lower power costs

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Consumer-Facing Properties

These assets depend on foot traffic, consumer spending, and location visibility. Revenue volatility is higher, but so is upside potential in strong economic cycles.

Retail Properties

• Anchor tenants drive traffic to smaller inline tenants, creating a symbiotic rent structure where anchors pay less per square foot but generate value for the center
• Percentage rent clauses tie landlord income to tenant sales, aligning interests but adding revenue variability
• Property subtypes include neighborhood, community, and power centers—each with different anchor strategies, trade areas, and financing profiles

Hotels and Hospitality Properties

• Daily re-pricing capability means revenue responds immediately to demand changes—highest upside but also highest volatility among CRE types
• RevPAR (Revenue Per Available Room) is the key performance metric, combining occupancy rate and average daily rate
• Management-intensive operations require either owner expertise or third-party contracts, adding complexity to investment analysis

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Logistics and Distribution Properties

E-commerce growth has transformed these from commodity assets into premium investments. Proximity to population centers and transportation infrastructure determines value.

Industrial Properties

• Clear height and column spacing are critical specifications—modern facilities require 32+ foot ceilings for racking efficiency
• Triple-net lease structures shift operating expenses to tenants, creating predictable NOI with minimal landlord management
• Last-mile locations near population centers command significant premiums over traditional suburban industrial parks

Warehouses and Distribution Centers

• E-commerce has driven cap rate compression—these assets now trade at historically low yields due to sustained demand growth
• Cross-dock facilities with multiple loading positions enable rapid throughput for time-sensitive logistics operations
• Infill locations are increasingly scarce—zoning restrictions and land costs limit new supply near major metros, supporting rent growth

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Residential Income Properties

Housing demand provides a defensive income base, though regulatory environments vary significantly by market. Population growth and affordability constraints drive long-term fundamentals.

Multifamily Residential Properties

• Shorter lease terms (typically 12 months) allow frequent rent adjustments, providing inflation protection but higher turnover costs
• Demand correlates with homeownership affordability—high home prices and mortgage rates push renters into apartments
• Operating expense ratios of 35-45% are typical, with property management and maintenance as major cost drivers

Self-Storage Facilities

• Month-to-month leases with high customer inertia—tenants rarely move belongings despite rent increases, creating pricing power
• Low operating costs and minimal staffing produce operating margins exceeding 60% at stabilized facilities
• Demand drivers include life transitions—moving, divorce, death, and small business inventory needs create consistent baseline demand

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Hybrid and Specialized Properties

These assets combine multiple uses or serve niche markets, often requiring specialized underwriting approaches. Complexity can create opportunity for sophisticated investors.

Mixed-Use Developments

• Diversified income streams reduce single-tenant risk—combining retail, office, and residential creates natural hedging across economic cycles
• Zoning complexity and entitlement value often represent significant portions of total project value in supply-constrained markets
• Financing typically requires multiple tranches—different lenders may take different components based on their sector expertise

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Quick Reference Table

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Self-Check Questions

1. Which two property types offer the strongest inflation protection through frequent rent resets, and how do their operating expense profiles differ?

2. A lender is evaluating two deals: a Class A office building with 7-year average lease term and a limited-service hotel. Which property likely requires a higher debt service coverage ratio, and why?

3. Compare and contrast the demand drivers for self-storage facilities versus multifamily properties. How might their performance diverge during a recession?

4. An investor is choosing between a single-tenant medical office building and a multi-tenant retail center. Which offers more predictable income, and what trade-offs does that stability involve?

5. If an FRQ asks you to recommend a property type for a risk-averse investor seeking bond-like returns with minimal management, which two property types would you analyze, and what lease structure characteristics support your recommendation?