When it comes to investing in commercial real estate, there are four main property types: retail, office, industrial, and multifamily. These property types exist together in an economic ecosystem supporting and benefiting from one another. At times, they are also combined into mixed-use projects where there is strong demand for multiple property types in a condensed urban area. These property types probably seem fairly self-explanatory, but let’s quickly go over the basics.
Retail will thrive where there are people with money who can find a place to spend it.
Retail Properties
Retail comprises everything from single tenant goods and service providers – like auto parts stores, restaurants, drugstores, and banks – to multi-tenant shopping centers – like grocery anchored strip malls, regional mega malls, and open-air “lifestyle” shopping villages. The drivers of a good retail location are population density, household incomes, traffic, and visibility. Retail will thrive where there are people with money who can find a place to spend it. While brick and mortar retail has recently been under pressure from online retailers, there is still a place and demand for physical retail. Service-based and experience-oriented retailers – like health and wellness providers, eateries, and entertainment venues – have been the current trend in this space. However, the zenith for big-box stores with giant parking fields and undistinguished tenant line-ups has passed.
Office
Office space includes downtown office skyscrapers, suburban office parks, and stand-alone office buildings along major thoroughfares. It’s where the jobs are and where employers corral their employees. A good office building is one that attracts good companies. This seemingly obvious statement is important because creditworthiness is extremely important in office space. You can’t collect rent from an entity that’s gone out of business, and re-tenanting costs are high. This is also true for retail space leased to small local businesses.
Companies will seek office space in different areas for a variety of reasons: large populations give employers access to deeper pools of potential employees; proximity to academic institutions gives employers access to highly educated and skilled workers; good transportation infrastructure, like freeway interchanges and public transportation hubs, easily gets employees to and from work; and political environments and governmental regulations present advantages and trade-offs for different businesses and industries.
Industrial
Industrial properties include assembly and manufacturing plants, warehouses, and datacenters. This class of CRE shares many fundamentals and drivers with office properties and often includes a small amount of office space as part of the larger industrial site. Demand for industrial space is heavily driven by geographical characteristics that are favorable to the manufacturing and shipping of goods. Areas rich in natural resources and raw materials will drive the production of goods, and proximity to major ports and supply chain infrastructure will enable these producers to efficiently deliver their goods to intermediate and end users.
Multifamily
Multifamily properties comprise multiple dwelling units in variable densities. High-density projects are typically made up of smaller units tightly packed on a relatively small footprint, and low-density projects have fewer – and generally larger – units on a larger footprint. Low density properties typically have a stronger community atmosphere with amenities and common areas like courtyards, pools, playgrounds, and picnic areas. Where land is scarcer, projects will have higher density. The key fundamentals to multifamily are employment and demographics. Multifamily succeeds in locations with low unemployment, growing populations, and strong household incomes. Renters typically desire apartments where there is easy access to robust area amenities such as main street retail, shopping centers, parks, and good schools.
People will flock to this prosperity, and when demand outpaces supply, rents increase along with property values.
Conclusion
Real estate is a commodity and its value is driven by supply and demand. Where there are jobs being created, there is prosperity. People will flock to this prosperity, and when demand outpaces supply, rents increase along with property values. However, these dynamics can be disrupted. Technology has disrupted commercial real estate in very meaningful ways. Retail has had to reinvent itself to continue to attract customers and compete with a growing share of transactions being made online. Office is in the midst of a reckoning as technology allows firms to decentralize, eliminating the costly overhead of corporate offices especially in prime downtown markets. At Albion House, we focus primarily on multifamily for a simple singular reason: technology will never disrupt the fundamental need for human shelter; at least not in our lifetime.
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