What Are the Main CRE Asset Classifications?
Commercial real estate assets are divided into several categories including the following:
- Industrial
- Office
- Retail
- Multifamily
- Special purpose
- Hotels & Hospitality
- Land
- Mixed use
Asset classes may have further classification within these categories. For example, office space is typically categorized as class A, B, or C. The qualifications consider factors such as age, aesthetics, quality of infrastructure, management, and location. Each class has its own level of risk and return. Class A office space represents the best buildings, demanding the highest rents. Class B is the next step down. This classification provides great opportunity for investors open to minor renovations and improvements. The last office class is C which has the lowest rental rates, would require major renovations, and often are targeted for redevelopment.
What Type of Commercial Asset is Right for Me?
Each asset class will have different average returns and performance, and these results can vary from market to market. Some items to consider within each asset class are average return, market availability, and current portfolio holdings (if any).
Average Return
Return always correlates with risk. Investors must first determine what risk they are comfortable with. Passive real estate investors are not real estate experts and are mainly interested in income from low-risk properties. Good options for passive investors would include low maintenance, fully leased, single tenant properties that are in good condition. For investors interested in a value-add opportunity, there is more reward available but at a higher risk. These investors are more experienced and are comfortable with investing in discounted property that requires improvements and/or finding new tenants and are willing to manage the process and take on the associated risk.
Rate of return in commercial real estate is measured by a metric called cap rate. Property classification & age are factors that impact the cap rate. For more information on Cap Rates and how they are calculated, see our post: What is Cap Rate in Commercial Real Estate?
Market Availability
It is important to consider not only returns and overall economy but also the specific market supply and demand when researching which asset sector best fits your investing thresholds. Market research is key. For example, if a specific market is flooded with available warehouse buildings, this may not be your best choice for investment. That is why it is so important to have an experienced local real estate professional on your team who is familiar with current local market inventory and conditions.
Diversification of Portfolio
Ideally, every investor’s portfolio should be diversified to include varying asset types (i.e., stocks, bonds, cash, property) and risk levels. Diversification will vary from investor-to-investor based on investment goals, timelines, and risk profile. Real estate is a tangible asset that is likely to appreciate. It also fluctuates much less than the stock market, which makes it an important consideration in portfolio diversification. Real Estate assets provide stability and attractive returns which balance out other more volatile asset holdings.
For help identifying assets that fit your investment needs or more information on our investment services, contact Pinpoint Commercial Real Estate at 601-586-3220. We’re your source for commercial real estate in Mississippi, so contact us today!