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What is Commercial Property Investment

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What is Commercial Property Investment

The term commercial property refers to properties that are used by firms to do business, such as office buildings, factories, hotels, warehouses, distribution centers, logistics centers, stores, shopping centers, restaurants, food outlets, cinemas, bowling alleys and other types of entertainment facilities, research and development (R&D) facilities, etc.

These properties are classified in general in four broader categories: office, retail, industrial, and hotels. Some classify apartments (for rent) also among the types of commercial property in the broader sense that landlords/businesses use them as a source of income by renting them to households.

In the case of commercial property, and especially for office and retail, access to households is extremely important, because they represent the consumer base that purchases the goods or services offered by the users of commercial properties. For this reason, historically, these types of commercial property (even industrial) were developed in the center of the cities or very close to it because that was the location most accessible to all households residing in the city. With the continuing urbanization of population and the expansion of cities to large metropolises, commercial property started appearing also in commercial nodes in the suburbs serving large suburban populations.

Office Property

According to Torto and Wheaton (1987) office buildings are used primarily by two major sectors of the economy, Finance, Insurance, and Real Estate (FIRE), and Services (including primarily Professional Services, Business Services and Government). Estimates show that 100% of FIRE workers and about 36% of Service workers are office space users and that these two sectors account for about 80% of total office employment, with the remaining 20% accounted for by the industrial sector (Wheaton, 1987). According to DiPasquale and Wheaton (1996), the Service subsectors that can be considered as office-using include Advertising, Computer and Data Processing, Credit Reporting, Mailing and Reproduction, Legal and Social Services, Membership Organizations, and Engineering and Management Services.

Carn et al. (1988) present a different analysis that points to a somewhat lower contribution of FIRE and Services to total office employment. In particular, these authors distinguish between office-using and non-office-using occupations using 1980 Census data on the occupational composition of the different sectors. Their analysis concludes that 67% of employees in the FIRE sector and 28% of employees in the Service sector are office space users. Their analysis suggests also that some non-negligible shares of employees in the other one-digit SIC sectors ranging between 16% and 38% may also be users of office space.

Office properties can be classified in terms of quality and technological characteristics to three classes: A, B and C. Class A office buildings represent the newest, most elegant, high-quality office buildings in the market equipped with the latest technological infrastructure used by contemporary firms that occupy office space. Class B office buildings are of lower, but decent quality, usually in buildings of 10 years or more, and are not fully equipped with the latest technological infrastructure.

Historical data show that the office market is highly cyclical due to the over-response of supply to office rent increases and the long time that it takes to supply to adjust to changes in demand. For this reason, advanced office market analysis requires special modeling of the office market.

Inudstrial Property

Industrial property includes warehouses, distribution centers, logistics centers, factories, and R&D facilities. Industrial property is demandedprimarily by firms active in transportation, warehousing, distribution, logistics and production. Industrial buildings differ from other commercial properties in the sense that they are simpler in their structure, mostly big boxes with higher ceiling heights and without internal divisions (open plan). Most of the cities in Europe and the US have created industrial zones in their outskirts where industrial properties can be developed.

Kinnard and Messner (1971) have identified five categories of users of industrial space on the basis of the dominant criteria used in their location selection process:

1) market-oriented, which represents industrial space users located strategically with respect to the final consumers of their products

2) resource-oriented, which represent industrial space users located close to resource inputs required for their production activities,such as raw materials or specific types of energy sources

3) transportation-oriented, including industrial space users where transportation cost is the most important location consideration

4) labor-oriented, including industrial property users for which labor availability, proximity and/or costs are the major concern, and

5) footloose, including industrial firms that are not restrained by any of the above factors in terms of choosing a location

Retail Property

Retail property refers to space used for the sale of goods. Retail property tends to cluster so consumers can find stores of all types at a single location. Today we can distinguish a number of different formats. The two basic formats though is strip retail format, which refers actually the strips of stores along a street, and shopping center format. Although there is a variety of shopping center formats and continuously new are developed shopping centers can be classified in five major categories: Neighborhood shopping centers, Community Shopping Centers, Power Centers, Regional Shopping Centers, and Super-Regional Shopping Centers.

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