Commercial Real Estate Foundational Concepts

Commercial real estate (“CRE”) investing can be a valuable addition to any investment portfolio by providing consistent cash flow, appreciation, and tax benefits - all backed by a physical asset. As with any investment class, when investing in commercial real estate, it’s essential to understand the various classes of opportunities available along with their associated risk-return profiles to align your investment goals and objectives with the prospective opportunity.

Commercial real estate can be divided into asset classes, building condition and location, and risk-reward classifications. The six primary CRE asset classes include multifamily, office, industrial, retail, hospitality, and special purpose. 

CRE can be further classified by building conditions and locations designated with the letters A-D. Finally, CRE can be classified by risk-return profile with the designations Core, Core-Plus, Value Add, and Opportunistic.

Asset Classes -

Building Conditions and Locations - 

According to this classification system, properties are graded according to a combination of geographical and physical characteristics. These letter grades are assigned to properties after considering a combination of factors such as the age of the property, location of the property, tenant income levels, growth prospects, appreciation, amenities, and rental income. 

Class A

Class A properties tend to be new construction or built within the last 5 to 10 years, with top of the line amenities and professional management. They’re located in the most desirable areas with high potential for appreciation with high-quality tenant profiles and with little to no deferred maintenance issues.

The prime locations and condition of these properties command high rents and experience low vacancies. Because of their premium condition and locations, Class A properties also come with premium prices.

Class B

These properties are generally 15-20 years old, with lower-profile tenants, and may or may not be professionally managed. Rental income is lower than Class A, and there may be some deferred maintenance issues. These buildings are typically well-maintained.

Class C

Class C properties are typically more than 20 years old and located in less than desirable locations. These properties are generally in need of significant renovations for repositioning in the market to achieve steady cash flows.

Class D

Class D properties are old, run-down, and typically, without exception, in need of significant repairs. They are located in distressed communities with high crime and poor schools. Tenants have low income and bad credit, with many even having criminal backgrounds. These properties are relatively cheap to acquire but also experience high vacancies and low appreciation.

Risk-Return -
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Assets under this classification system are differentiated by their levels of risk vs. reward with Core real estate investments on the low end and Opportunistic real estate investments on the high end of the risk-reward spectrum. 

​Commercial real estate investing can be a valuable addition to your investment mix. 

By becoming familiar with the various CRE asset classes, categories, and risk-return profiles, you’ll have the knowledge to adequately assess the opportunities presented to you and make investment decisions confidently that align with your investment objectives.