Many people are interested in investing in commercial real estate, enticed by the high earning potential and long-term stability. Unlike residential offerings, commercial buildings operate through longer leases, larger tenant populations, and greater risk potential.
These qualities can sound intimidating at first, but can be mitigated by the property type you choose to invest in. Understanding the different property types will help you plan for the long-term physical and financial challenges associated with each one.
Types of Commercial Real Estate
Every first-time real estate investor’s research should start with learning about the different categories of commercial properties and how they generate profit.
Office Spaces
Office spaces are one of the classic commercial property types. These offerings range from downtown high-rises to old, nearly abandoned buildings. In general, office buildings are separated into three categories:
- Class A Office Buildings: The most advanced buildings in desirable locations, typically in the heart of a city’s financial district. These office spaces offer high-quality finishes, advanced infrastructure, and security.
- Class B Office Buildings: These include older properties (10 to 20 years) that appear decently maintained. These office spaces are typically located in more professional areas and have modern amenities like HVAC systems.
- Class C Office Buildings: Significantly aged buildings located in undesirable areas. These locations often lack expected amenities like elevators or air conditioning.
The office space market has been declining since the pandemic. Office vacancies are at an all-time high, and more properties are set for removal than construction. There are still profitable opportunities, but first-time investors should be extra cautious.
Multifamily Properties
Multifamily real estate includes buildings used by multiple household units, such as apartment buildings, subdivisions, or condominiums. Housing properties are generally safe investments, and many people choose to start with renting out single apartments or houses.
Multifamily units provide a more stable income source. Multiple tenants lower the risks of complete vacancy, and one delinquent tenant payment won’t cause the property to lose all profitability.
Housing availability and affordability are also issues across the US. These problems mean there are many investment opportunities at multiple levels.
Industrial Properties
Large land requirements and heavy-duty buildings characterize industrial real estate. These properties are typically used for manufacturing, warehousing, or research and development purposes.
The growing importance of e-commerce and global supply chains bolster these properties. Renters usually need long leases, which provide a stable cash flow and greater resiliency to economic changes.
Industrial units also do not require the same frequent cosmetic upgrades as offices, shopping centers, or other professional units. Properties like warehouses are only focused on functionality, lowering long-term maintenance expenses.
However, 2025 Q2 marked the first decrease in new construction since 2015, according to Avison Young reports. Occupancy rates are still strong, but new investors may want to watch for developing trends.
Retail Properties
Retail properties include shopping malls, strip centers, and independent brick-and-mortar stores. The e-commerce boom has hit retail properties, causing a decreased demand for physical sales locations.
These locations take longer leases than living spaces but shorter than industrial properties. It is also more challenging for owners to find tenants, causing elongated vacancy periods and increased losses.
Investors should pay special attention to the location and surrounding businesses before investing in retail properties. A retail complex bordered by a grocery store, school, or park is entirely different from an outdated indoor mall.
Special-Purpose Properties
A special-purpose property is any property with a physical design or location that restricts its use cases. Examples include museums, bowling alleys, amusement parks, and hotels. Each of these property types has elements that severely limit what a new investor can do with the building.
These properties may seem too niche, but they often serve a community’s unique needs, allowing the right investor to capitalize. For example, a family medicine office has a restrictive layout but meets an essential need in the community.
Potential investors should also ensure that the special-purpose property can survive in the current market. If the market is oversaturated for the property’s purpose, then locating a successful tenant will be far more challenging.
Hospitality Properties
Hospitality real estate includes short-term rental facilities like hotels and motels. This sector is attractive in areas with high tourism or business travel.
One of hospitality properties’ greatest strengths is dynamic pricing. These units do not generate profit through extended leases, so they can adjust prices in the short term to match demand fluctuations.
However, hospitality can be volatile. Some locations earn the bulk of their profit in a brief time frame, such as during holiday seasons. This truncated profit window means that unexpected problems during those times are much more damaging.
What to Know Before Buying Commercial Real Estate
Once you understand the various property types, the next step is learning the essential principles that guide a successful purchase.
Learn About Types of Commercial Real Estate
The previous section briefly covered property types, but you must choose one that matches your financial goals, risk tolerance, and time commitment. For example, a steady, long-term income matches with multifamily units, while hospitality or retail spaces offer higher risk and returns.
Additionally, consider your budget, tolerance for vacancy periods, and how to handle management and research. Commercial properties are sometimes lifetime investments, and investors must think about how their investment will affect them long-term.
Secure Financing
Commercial real estate requires significantly more capital than the average residential deal. Traditional loans are an option, but lenders typically demand larger down payments, pristine credit standing, detailed business plans, and a secure source of income.
There are many other types of loans, including bridge loans, conduit loans, SBA loans, and hard money loans that cater to people in different circumstances. For example, bridge loans are for people who need to “bridge” that gap before obtaining more substantial financing.
In many cases, tackling a commercial real estate loan by yourself isn’t an option. Investors often partner with others or obtain a pre-lease agreement to show future earnings.
Budget for the Unknown
First-time investors should budget for more than the purchase price. Commercial properties typically bring unexpected expenses, such as commercial liability insurance or required renovation due to new legislation.
Investors must research what circumstances can affect their cash flow. Things like extended vacancies, disaster damage, and increased property taxes should be budgeted in. A safe approach is to set aside five to ten percent of your project cost for unexpected needs.
Use the Right Success Metric
A commercial property owner should not measure success based on gross rent. Net Operating Income (NOI) is calculated by subtracting all expenses from the gross rent. A positive NOI means that investors can pay back financing sources without harming themselves.
Investors should set profitability goals before buying into a property. Many real estate investments do not pay a profit for years or decades after the purchase, and investors should carefully observe NOI to see if they are on pace for the expected break-even point.
Evaluate Properties Through a Property History Search
A brief description of a property is not enough to invest in. A property history search can reveal the chain of title, lease agreements, foreclosures, and lien records. This information allows investors to gauge the property’s condition and predict future expenses.
Prepare for Tenant-Related Risks
The best property investments have high occupancy rates. Strong tenants provide steady cash flow and take on long lease periods. Weak tenants can cause needless wear, increase maintenance, and otherwise disrupt cash flow.
Investors can reduce the risk of signing a bad tenant by having a robust screening process. Precautions like credit and background checks can highlight any undesirable character or financial traits.
Tenants may also seek damages against property owners over injury, discrimination, or privacy violations.
Know the Hidden Costs of Small Deals
Small properties are a less daunting proposition for new investors. However, small deals still come with similar costs to their larger counterparts. Transaction fees, inspection fees, and maintenance expenses affect all purchases.
Addressing these costs on a large scale can be cheaper per unit in large deals than in small ones. This is because those costs take up a lower percentage of the budget when dealing with a twenty-million-dollar apartment complex compared to renting out a duplex.
Don’t Neglect Due Diligence
Due diligence is the process of verifying the condition, chain of title, and surroundings of a real estate investment. Inspections, environmental assessments, lease reviews, and zoning checks all protect you from a potentially disastrous purchase.
Reserve Cost Contingencies in Construction
Many properties require renovation or construction before operations. Building costs often run higher than expected as contractors discover hidden issues. Other delays, such as late permits or rising supply costs, can push back the opening date.
Investors must be prepared for losses in case of forced vacancies. Reserving an extra ten percent of the budget will help cover these costs.
Look for Property Managers
Commercial property management requires a huge amount of time investment and understanding of the field. Problems must be managed swiftly and creatively, and many first-time investors are not prepared to do so.
Properly handling tenant placement, rent collection, and maintenance calls can make or break an investment property. Hiring a professional manager will save time and reduce mistakes in countless daily issues.
Stepping into commercial real estate as a first-time investor is both exciting and challenging. However, investors should do thorough research before stepping into any deal, verifying that the opportunity aligns with their financial goals, risk tolerance, and long-term life plans.
