Pros and Cons of CRE Investing: Office, Retail, Industrial, Multifamily
Real estate investing provides multiple benefits to landlords. It offers investors higher returns than stock and bond investing, builds tangible investment assets, helps grow equity, and provides investors an avenue for passive income. However, depending on the market and economy, each asset type can also carry various risks and benefits.
Depending on your goals as an investor, you ought to be picky; not every asset class can help you reach your goals. Here is a breakdown of the four most prominent asset classes, including a brief assessment of each investment opportunity’s benefits and risks.
Pros and Cons of Office Investing
Office properties can be broken into three primary asset classes: Class A, Class B, and Class C. Each class has a set of criteria that define it, including quality, age, amenities, aesthetic, and more. Class A properties are among the finest spaces in the market. They generally include new developments or properties that have undergone significant remodels or renovations, and they tend to house luxurious amenities, including fitness centers, covered parking, cafes, and more.
As you step down to Class B and Class C, properties begin to diminish in quality and amenities.
Pros of Office Investing
- Various uses allow investors to get creative to ensure maximum occupancy. Office spaces can be used as medical offices, traditional offices, flexible space, creative space, and more.
- Offer longer-term leases, typically 5 to 10 years. As a result, office investing provides a hedge against inflation. Additionally, office spaces experience less turnover compared to other asset types.
- Low unemployment rates signal a strong demand for office space.
Cons of Office Investing
- Tenanting properties can prove to be more challenging due to varying demands by tenants regarding tenant improvements. Additionally, this can prove more costly when filling vacancies.
- Office buildings in prominent areas are abundant, creating a competitive marketplace for property owners.
- Financing can be more costly for office assets.
Pros and Cons of Retail Investing
Retail properties, similar to office properties, can vary in their quality. Just like office properties, the more upgrades and improvements in a property, the higher the value. However, these properties are broken down further by their condition, with the most common types, including:
- Power centers
- Community centers
- Convenience centers
- Single-tenant properties, and more.
Pros of Retail Investing
You’ve heard this before, but when considering this kind of asset, it is all about location, location, location! This term can be a driving factor in an asset’s value, especially when considering a property without a strong, corporately backed lease. Owning properties in Southern California areas can prove to be more expensive; however, they ensure security for any investor. Additionally, retail spaces tend to offer:
- Less tenant management, especially for NNN leases.
- Longer leases for corporate stores, providing investors a long-term stable investment.
Cons of Retail Investing
Unfortunately, retail investing can present its challenges as well:
- Retail properties are prone to recessions during economic downturns.
- Due to e-commerce trends, many retail locations are becoming obsolete. Tenants are becoming more creative to get consumers into brick-and-mortar locations.
Pros and Cons of Industrial Investing
Industrial properties include properties that are used for manufacturing, processing, warehousing, and retail purposes. Experienced industrial property owners have had the fortune of undergoing the benefits that came with a global shift towards e-commerce. More companies are seeking industrial space, which has driven the value of industrial markets.
Pros of Industrial Investing
- Looking at a long-term investment strategy, these assets can supply secure positive cashflow.
- Due to the nature of the buildings, these properties require less maintenance.
- Due to the improvements that go into modifying spaces, tenants lean towards longer-term leases.
Cons of Industrial Investing
- Similar to office buildings, finding a replacement tenant can be expensive and time-consuming. Tenants demand different functions in their operations, creating a broad scope of needs for their space. Therefore, this sector, overall, can prove to saddle investors with slightly higher risk.
Pros and Cons of Multifamily Investing
Like office buildings, multifamily assets can be categorized into Class A, Class B, and Class C; again, the criteria for these assets transfer to this class: new developments offering tenants multiple amenities are considered Class A, while Class B and Class C tend to be older with fewer amenities.
Pros of Multifamily Investing
- Historically speaking, multifamily assets have proven to offer investors substantial returns in any market and economy.
- A shift in the lifestyles of millennials is driving them to rent rather than pursue a home acquisition. They are seeking hospitality type living and are willing to pay higher rents in such developments.
- These properties offer unlimited value-add opportunities for landlords.
Cons of Multifamily Investing
- Depending on the market, but especially in California, multifamily properties are expensive, hitting as low as 3-caps in some markets.
- With multiple tenants utilizing the space for their day-to-day living, these properties are time-consuming and often require numerous renovations annually. Any investor in this space needs to either be attentive and ready for engagement or be prepared to invest in a management company.
Which Is Right for You?
This article provides only a brief outline of some of the pros and cons affiliated with each type of asset, but until you speak with a professional about your investment goals, there is no right asset for you. You must consider your long-term goals as well as what you are willing to input upfront – after a detailed assessment, you can find the right property to match your needs.