CRE 101 Series

1. 1. What is CRE?
2. 2. The T12
3. 3. NOI Explained
4. 4. Cap Rates
5. 5. Property Types
6. 6. How Properties Make Money
7. 7. Lease Structures
8. 8. Financing Fundamentals
9. 9. Key Investment Metrics
10. 10. Valuation Basics
11. 11. Reading a Rent Roll
12. 12. Pro Forma Rent
13. 13. Risk Profiles
14. 14. Due Diligence
15. 15. The Acquisition Process

In This Article

Commercial Real Estate Property Types: A Beginner's Guide

Commercial real estate isn't one asset class, it's several distinct ones, each with its own tenant profile, income drivers, and risk character. Before you can underwrite a deal with any confidence, it helps to know what you're actually looking at and how it differs from the property type next door. The first chapter in this series covered what commercial real estate is at a high level, this chapter breaks it down further.

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Multifamily

Multifamily properties are apartment buildings, ranging from small garden style communities to large high rises, leased out to individual residents.

• Tenant profile: Individual renters, dozens to hundreds per property.
• Income driver: Rent collected from many separate leases, plus ancillary income like parking, storage, or pet fees.
• Typical lease term: 12 months.
• Risk character: Lower per-tenant risk due to income diversification across many units, generally resilient across most economic cycles.

Office

Office properties house business operations and range from small suburban buildings to large urban towers.

• Tenant profile: Businesses, from single small tenants to large corporate occupants.
• Income driver: Rent tied to leasable square footage, often with tenant improvement allowances built into deal economics.
• Typical lease term: 5 to 10 years.
• Risk character: Higher vacancy cost and longer downtime between tenants, closely tied to employment trends and business confidence.

Retail

Retail properties are built around consumer facing tenants and range from single tenant pad sites to large shopping centers.

• Tenant profile: Retailers, restaurants, and service businesses, ranging from national credit tenants to small local operators.
• Income driver: Rent tied to location, visibility, and foot traffic, often with a portion of expenses or sales passed through to the tenant.
• Typical lease term: 3 to 10 years, longer for anchor tenants.
• Risk character: Performance tied closely to consumer spending and the health of individual retailers, necessity based tenants tend to be more resilient than discretionary ones.

Industrial

Industrial properties include warehouses, distribution centers, and light manufacturing space, built for efficiency rather than appearance.

• Tenant profile: Logistics, distribution, and manufacturing tenants, often fewer tenants per property than other types.
• Income driver: Rent tied to square footage and location relative to transportation infrastructure.
• Typical lease term: 5 to 10 years, often longer for large single tenant facilities.
• Risk character: Historically lower turnover and straightforward operations compared to other property types, though demand varies by submarket and shifts with broader logistics and supply chain trends over time.

Hospitality

Hospitality properties, primarily hotels, house short term guests who pay by the night rather than signing a lease.

• Tenant profile: Transient guests rather than long term tenants.
• Income driver: Room rate multiplied by occupancy, plus ancillary revenue from food, beverage, and event space.
• Typical lease term: Nightly, effectively no lease at all.
• Risk character: The most operationally intensive and most volatile property type, income can shift week to week with travel demand.

Additional Property Sectors

A handful of additional property sectors round out the CRE universe. Some, like healthcare, self-storage, and data centers, have grown into significant institutional asset classes in their own right, not niche afterthoughts. Others, like land, are a different kind of holding entirely.

• Healthcare: Medical office buildings and outpatient facilities, typically longer leases and more stable demand due to non-discretionary services.
• Self-storage: Individual storage units rented month to month, low tenant improvement costs and simple operations.
• Data centers: Facilities built to house computing infrastructure, extremely high build out costs and specialized tenants.
• Land: Undeveloped or entitled parcels held for future development rather than current income.

A Note on Property Class

Property class (Class A, B, or C) is a separate concept from property type, and it applies across nearly every category above, not just one.

• Class A properties are newer, well located, and command the highest rents with the lowest operational risk.
• Class B properties are solid and functional but older or less updated, often the target of value-add investors looking to reposition.
• Class C properties are the oldest and most management intensive, offering the highest potential return alongside the highest risk.

Class is a useful shorthand, but it's a qualitative label, not a substitute for underwriting the actual numbers on a specific property.

Comparison at a Glance

Why Property Type Matters for Underwriting

Property type isn't just a label, it directly shapes how you underwrite a deal. Different tenant profiles mean different vacancy and credit loss assumptions belong in your NOI calculation. Different lease structures mean expenses flow differently between landlord and tenant. And different risk characters mean investors and lenders price the same dollar of NOI differently depending on what kind of property it's coming from.

Common Mistakes

• Applying assumptions from one property type to another. A vacancy factor that makes sense for multifamily doesn't automatically apply to industrial or office.
• Treating property class as a substitute for underwriting. A Class A label doesn't guarantee performance, and a Class C property isn't automatically a bad investment, the numbers still have to work.
• Ignoring how tenant concentration affects risk. A single tenant industrial building carries different risk than a 200-unit apartment complex, even if the projected NOI looks similar on paper.

FAQ