Income producing investments typically encompass four broad types: industrial, office, retail and leased residential. Additionally, senior care housing, hotels, resorts, and mini storages are also popular for producing income. Perhaps the most important trigger for commercial property demand is job growth.
A variety of other drivers influences the performance of a property as well. What could be an excellent investment today may not perform as well in the future. Let’s examine the common types of commercial real estate and their respective demands:
Retail property can come in a variety of forms ranging from a single building to sprawling shopping centers.
A large number of retail properties will have a well-known retailer serve as the anchor of the center and will draw shoppers to other smaller units, known as a commercial retail unit (or CRU). In a large number of retail properties across the country, the anchor of the center is food and grocery related. The demand for retail space will be dependent on a variety of factors including demographics of the surrounding area, population density, visibility, and location. Since retail leases tend to be for longer durations, the returns in the retail sector tend to be more stable.
Many experienced real estate investors prefer industrial property holdings for their lower operating expenses and decreased time managing.
When looking at industrial properties there are a few major factors to consider, including the location of major transport routes, configuration of the building and office build-out opportunities. Industrial properties can vary in form from distribution centers to warehouses and manufacturing plants.
Known for delivering some of the most stable returns in the commercial real estate business is the category of multi-family residential property.
Just like we need food and water to survive, people always need a place to live. Residential occupancy rates remain fairly consistent and when a tenant does move out it doesn’t affect the bottom line as much in this form of real estate as it would in an office or retail type of setting.
Office property investments usually serve as a flagship investment for real estate owners as they tend to be a high profile property.
The locations vary from suburban office parks to the hustle and bustle of downtown centers. White collar jobs thrive in office space environments, and the demand for office space remains consistent across the board. However, what an office property investment can return may vary in relation to economic performance. The downside of owning office space is that high operating costs may be involved. If a tenant vacates an office space, then the return on the property may decrease significantly. Office tenants may be more inclined to relocate over other types of commercial real estate. Because of technology and other factors, some office tenants are downsizing in favor of allowing employees to work at home. A move to non-dedicated offices has also been on the horizon, while not currently a major threat it is something to consider.
Offices are further evolving with more standardized workspace and additional on-site amenities. The future also involves more collaborative workspace settings as well. Space efficiency has become more of a concern for office tenants as they look to a higher rate of space utilization. Temporary office space vendors have also come into play which allow for an alternate location to handle overflow of employees. Less space is needed as more businesses go paperless and downsize to smaller business operating devices. Previously, the average amount of leased space per worker was around 185 square feet, which is well below levels from just a decade ago. Many predict the trend to downsize office space to continue in favor of efficiency and cost-savings. Overall, the lower square foot per employee footprint model has been a successful one. While many demands have decreased in office space, some have increased. Parking can be an issue when a company places more people into a space, as well as additional demands on bathroom facilities and utilities.
Demand for commercial real estate remains strong, for the most part, as business spending increases. Commercial construction is on the uptick, and the labor market has continued making positive strides.