What to know about CRE Asset Classes

July 15, 2022

Reviewing financial reports

Real estate is a great way to build wealth and can be divided into two primary categories – commercial real estate and residential real estate. They are further broken down by the purpose, price, location and more. Commercial real estate is purchased by investors to generate income and enjoy capital appreciation. It comes with its own unique risks and benefits. Under real estate asset classes, there are various types of properties to choose from. There could be many differences but no particular asset class is better than the other types of commercial real estate. It depends on your risk-return criteria and investment preferences. There is no one-size-fits-all in commercial real estate investing. 

4 Common Types of Commercial Real Estate Asset Classes

As against common belief, commercial real estate offers a wide variety of structures to choose from and if you want to understand the same, let’s dig deeper into the common types of commercial real estate asset classes. 

  • Multifamily Residences – A multifamily residence consists of all the residential real estate excluding single family homes. It includes high-priority investments like townhomes, apartments and co-ops. Since living spaces are of utmost importance, these buildings will always carry some degree of value. 
  • Office Buildings – Another popular real estate asset class, office buildings can range from one-storey buildings to multi-storey urban spaces. They can be a lucrative commercial real estate investment since most buildings are developed for multiple tenants and can generate several revenue streams for investors. It helps maintain cash flow and provides income diversity. 
  • Industrial Units  – Industrial buildings are a good investment for the leases and long-term return. They carry low risk and have low overhead costs. Industrial units are located on the interstate highways which provide convenient delivery and shipping. With the growth of the e-commerce industry and order fulfillment requirements, industrial units remain high in demand. The buildings vary in size, format, layout and purpose. 
  • Retail Locations – In the real estate industry, retail applies to the buildings that are occupied by businesses that offer products or services to the customers. Due to the rise in e-commerce, there is a dip in retail foot traffic but the structure still plays a big role in the retail business model. They usually have long leases and provide a steady cash flow. Retail properties can be divided into regional malls, shopping centers, community retail center, power center, outparcel and more. 

What are property classes?

CRE asset classes can be divided into three and the classifications can provide a quick way to assess the property. They are Class A, B and C. Each class has different levels of risk and return on investment. The class is assigned a letter grade based on the location and age of property, income level of the tenants, rental income, appreciation, amenities and more. 

  • Class A – The Class A structures are known as the well-located building of the best quality in the industry. They are new, have the latest amenities and are professionally managed. The buildings usually have low vacancy rates even with a high rent and they often have low maintenance issues. 
  • Class B – Class B properties are a little older and the buildings are not always professionally managed. They are one step below Class A. The rental income is lower and the buildings are well maintained but could have maintenance issues from time to time. With little renovation or improvements, the property could receive a class upgrade. 
  • Class C – The last grade, C has properties that are over 20 years old and not located in the best areas. They will need renovations to upgrade and have lower rental rates. 

Commercial real estate investing is a great way of entering the real estate market to enjoy passive income and portfolio diversification at low risk.

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Investing in the commercial real estate space is a great way to enjoy passive income while watching your investments grow. In an uncertain market like today, CRE investment can bring stability to your portfolio.