There are eight main types of commercial real estate and the three CRE classes (Classes A, B and C) that are generally accepted in the CRE industry, which we explain in this article. If you are looking to invest in CRE, do business with CRE companies, or simply want to learn more about the commercial real estate industry, these classifications will help you understand how and why the industry classifies buildings in certain ways.
What Are the 8 Types of Commercial Real Estate?
Broadly speaking, CRE falls into these four categories:
Office buildings
Office buildings include structures that serve a commercial purpose: professional organizations, banks and financial firms, governmental and administrative offices, medical offices that don't perform diagnostic or surgical procedures, coworking spaces, call centers, etc.
Industrial buildings
Industrial buildings are defined as structures where manufacturing, assembly and warehousing take place.
Logistics facilities are included in the industrial use classification, which includes cross docks, where shipments are received and either picked up by customers or transferred from between transportation companies.
Manufacturing can include light manufacturing, heavy machining, assembly and job shops. Typically industrial buildings have high ceilings, large open spaces to accommodate machinery and equipment, loading docks for receiving and shipping, and specialized electrical and HVAC systems. Industrial buildings are usually located in proximity to shipping routes and transportation hubs, airports, train yards, seaports, and major highways.
Retail buildings
This classification of CRE defines commercial properties that are used for consumer trade, such as shopping centers, regional malls, free-standing buildings, and pop-ups. It can also include mixed-use buildings, but we've separated that and go into more detail in the next section.
Examples of retail buildings include:
Free-standing retail: Walgreens, Costco, McDonald's and any single-use commercial retail building
Strip malls: These are typically single-story buildings that house multiple businesses such as convenience stores, restaurants, boutiques, cell phone stores, clothing stores, banks, and more.
Regional malls: A regional mall is a large destination shopping center that houses small, medium and large (anchor) retailers such as Macy's, Dillards, and Bloomingdale's. They're also typically home to multi-screen movie theaters and food courts. Regional malls are usually enclosed.
Shopping centers: Similar to malls, these CRE properties contain a mix of anchor stores and smaller retail shops. You might also find a variety of restaurants and even food courts, depending on the location.
Outlet malls: Usually located along major highways outside of major metropolitan areas, these retail shopping centers are geared toward bargain shoppers.
Mixed-use buildings
Mixed-use buildings are typically two- or three-story buildings where retailers are housed on the ground level, and apartment-style homes are on the upper levels. It's common in urban areas. You might also see a mixed use of hotel and entertainment businesses with residential.
Multi-family dwellings
Although these are residential buildings, multi-family housing is considered commercial real estate because they generate income. A multi-family building can be as small as a duplex and as large as a skyscraper apartment building in Manhattan.
Hotel and hospitality
Within this category are hotels, motels, convention and conference centers with attached hotels (although those could also be classified in the last section, special use).
Land
Land refers to any type of real estate that doesn't have buildings on it, such as farmland, undeveloped land, vacant lots, brownfields and city infills.
Special purpose CRE
This is sort of a catch-all category for commercial real estate that doesn't fall into the other seven categories. It could include sports arenas and stadiums, amusement parks, theaters, parks and zoos, for example.
What Do Class A, Class B and Class C Mean in CRE?
Commercial real estate is broken down into three main categories: Class A, Class B, and Class C. Each category has specific requirements for the building and space in which it is placed. The classes are determined by value, which depends on the size, location, age, condition and other factors.
Class A real estate defined
Class A real estate is typically the most expensive and prestigious type of real estate. It includes office buildings, schools, hospitals, and hotels. Class A properties typically have a high value because of their location and size.
They are the most prestigious in the commercial real estate world and are typically located in high-traffic areas or near major transportation hubs. Class A building definition states it must meet stringent standards for size, design, and construction.
These properties generally have a higher value than other classes, making them more costly to obtain and maintain. Class A properties may be subdivided into two subclasses: prime property and non-prime property.
Prime property refers to commercial buildings that are in excellent condition and have strong tenants. Non-prime property, on the other hand, typically refers to buildings that need renovations or repairs.
What is a Class A building? As you drive through your local metropolitan area, you might notice high-rise buildings with plush amenities like granite floors, outdoor patios for workers, modern office space with high-speed internet, and perhaps even LEED certification, which is an energy-efficient designation. These are likely considered Class A commercial real estate because of their amenities, use and value.
Class B real estate defined
Building Class B meaning is defined as real estate containing primarily office, industrial, or retail space. These properties are generally smaller in size than Class A properties and may be located in a more suburban or rural area. Properties classified as Class B generally have lower appraisals (therefore lower price tags) than those in Classes A or C, and they tend to be more affordable for investors.
This class is considered real estate is the second most expensive category and includes properties used for offices, restaurants, hotels, and other similar businesses. Properties in this category tend to be less desirable than those in Class A due to a limited number of high-quality tenants.
What are the differences between Class A vs Class B office space? Class B tends to have lower rents and property values than Class A. This could be because of location, age, and condition. If the building doesn't have modern high-speed internet, for example, it could be considered a Class B.
Class C real estate defined
Class C properties are smaller than Class A and B properties and typically cater to local businesses or customers who don't need the amenities of a higher-class property. It is the most affordable category and includes properties used for storage, manufacturing, or any other type of business not considered prime or non-prime. Properties in this category are generally older and less well-maintained than those in the other two classes.
That concludes our beginner's guide to understanding CRE classifications. Check out our comprehensive asset class guides for more information on the intricacies of commercial real estate.