Understanding Asset Classes can Help You Achieve Your Commercial Investing Goals
As a commercial real estate investor, your success lies in being an expert in the intricacies of your field as well as the market. So, it’s important to understand all the commercial real estate asset classes, including the types of properties ripe for investment. Each property type within the real estate asset class has benefits and drawbacks that should be considered in regards to your short-term and long-term investment strategies.
Below we take you through what an asset class is, the three major real estate asset classes, and the six property types within those asset classes. The goal here is to help commercial investors understand the benefits and the best time to invest in the various types of commercial real estate.
What is an Asset Class?
Investopedia defines an asset class as “a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are thus made up of instruments that often behave similarly to one another in the marketplace.”
Examples of asset classes include:
- Real estate
- Stocks, mutual funds and other equities
- Bonds and other fixed-income
- Alternative investments (cash and equivalents, commodities, currencies, real estate and more)
The real estate asset class is broken into two categories: residential and commercial real estate, which are further broken down by property type and classification.
3 Classifications Within Major Real Estate Asset Classes
The major real estate asset classes are categorized by characteristics that define a property’s quality. The three major classifications range from Class A through C, with each letter grade representing a combination of factors including location, tenant income levels, potential growth and more.
The three major classifications are as follows:
Class A buildings are the highest quality properties in their market. They offer the best amenities. Such real estate has newly constructed or renovated buildings, top-ranked schools and wealthy residents. Due to such characteristics, the real estate is purchased and sold at the highest prices, thus tenants pay expensive rent rates. The competition to purchase such investment properties is high, and the properties offer a tight profit margin.
Class B properties are mid-tier investment opportunities. Typically, the buildings are older than 20 years, requiring renovations and ongoing investment. The market can be characterized as that of the middle class: quality restaurants and shops, and average school ratings all in a well-kept neighborhood. Class B real estate is considered a “value-add,” but comes with a higher risk than Class A. Profit margins are higher, and competition is lower.
Class C properties are typically older than 30 years, requiring many renovations. Although they can be purchased at a low price, the investment is deemed risky. However, if an investor is able to turn the building around, it can have excellent potential for profit.
Can Class B & Class C Become Class A Real Estate?
All properties can move up or down in classification. For instance, if Class A real estate ages to more than 20 years old and in need of several renovations, it can be downgraded to Class B. If a Class C property is extensively renovated and upgraded with the latest amenities and furnishings, plus is located in a desirable neighborhood, it has the potential to transition to Class A real estate.
6 Property Types Within Commercial Real Estate Asset Classes
There are six types of properties within commercial real estate asset classes:
Multifamily properties can be an attractive option for commercial real estate investors because they come with the built-in demand for housing. According to Equity Multiple, such investments are most appealing in supply-constrained markets.
Retail investments, specifically standalone retail stores, are typically the longest-running and most stable, providing long-term cash flow to investors, per Equity Multiple.
Office buildings typically lend to long-term leases ranging from five to 10 years, resulting in stable returns and predictable cash flow. Such properties are most beneficial to investors during times of economic expansions as companies grow and look to add more office space.
According to Equity Multiple, the hotel sector can provide outsized returns in growing economies. Additionally, the leisure travel and business activities areas can lead to demand for new hotels.
Similar to retail, industrial real estate provides some of the most stable returns on the market due to long-term leases and low overhead costs. The property type is most attractive when the manufacturing sector experiences growth.
Although development properties are the riskiest investment opportunities available, they have the potential to provide the highest returns—when done right.
Real Estate Investing Classes
While this introductory article is important in understanding real estate asset classes in the commercial market, investors should continue their education with real estate investing classes. Here are several real estate investing courses you should look into:
- Roofstock Academy
- Real Estate Investing Courses | Coursera
- Real Estate Online Courses: Investing, Flipping, and Selling | Udemy
Extensia Financial Provides Loans for All Commercial Real Estate Asset Classes
Extensia Financial partners with credit unions and brokers to provide commercial real estate loans for projects of all asset classes, including retail, multi-family housing, office buildings, self-storage facilities, educational institutions and much more. Our CRE loan products range from $2 to $25 million with terms of five to 10 years and amortization of up to 30 years.
Contact us today to learn more about our commercial real estate loans.