Commercial real estate encompasses a wide array of property types, including office buildings, apartment properties, malls, shopping centers, warehouses, distribution facilities, and research-and-development or research-laboratory properties. Buildings made up of a mix of office and industrial space are called â€œflexâ€ properties. If 50% or more is office, the property is called â€œoffice/flex.â€ If less than 50% is office, it is called â€œindustrial/flex.â€ Some flex properties include research-and-development or laboratory space.
Niche Property Types
In recent years, an increasing number of investors have begun investing in so-called niche property types. These include specialty properties such as apartment complexes specifically for college or university students, age-restricted apartment complexes for older residents, self-storage facilities, and office buildings that cater to doctors and other medical-related tenants.
Other investors acquire raw land, with the goal of obtaining the appropriate permits so that, within zoning regulations, properties could be built on it.
Some investors are beginning to look at infrastructure as a possible niche real estate investment. Currently, infrastructure is often classified as a subset of private equity investing. Some companies invest in â€œsocial infrastructureâ€ (prisons, courts, hospitals, municipal garages, municipal buildings and schools) or â€œtransportation infrastructureâ€ (airports, rail stations, ports, toll roads, bridges and tunnels) â€“ areas that have some crossover with real estate. For example, there are already real estate investment trusts that invest in prisons, and investment funds that invest in hospitals or garages. And most airports and rail stations have a retail/restaurant component.
Basic Terms to Know
Office, industrial and retail properties are measured in square feet. Buildings can be measured in â€œgross square feetâ€ or â€œnet square feet.â€ A 1987 article in the New York Times offered definitions of both terms: Gross square feet – â€œthe sum of the areas at each floor level, including cellars, basements, mezzanines and â€¦. Included are all stories or areas that have floor surfaces with clear standing head room (6 feet 6 inches minimum) regardless of their use.â€ Net square feet – â€œthe sum of all areas within the perimeter walls of the unit measured to the inside faces of said walls and including all columns, shafts, ducts and risers whether separately enclosed or not.â€
Apartments, hotels and self-storage facilities can be measured in square feet, but are more commonly measured in units or rooms. For example, an apartment complex may have 200,000 square feet, but would more commonly be described as having 1,500 units. A hotel may have 100,000 square feet, but it would be more common to identify it as having 500 rooms.
Properties are often identified not only by their address, city or state, but by the submarket in which they are located. Some submarkets are essentially neighborhoods, such as in Manhattan, which identifies such places as Chelsea, Harlem and Times Square as submarkets. Other submarkets are regions, such as Northern New Jersey or Silicon Valley, in Northern California.
The cap rate is the initial annual return that a buyer can expect on his investment. It is calculated by dividing the purchase price by the projected net operating income for the first year of the investment. If a building sells for $10 million and generates $1 million of projected net operating income, the cap rate is 10%. Investors can use cap rates to compare the returns of their real estate holdings to the performance of other types of investments, such as stocks and bonds.
For some properties, it is important to consider the initial annual return. But for other properties, it is more appropriate to consider the stabilized return â€“ ones that are either not well leased, have leases that are about to expire or are candidates for conversion to other uses.
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