Key Things to Know About Commercial Real Estate

commercial real estate

Owning commercial real estate comes with many benefits such as passive income, capital appreciation, cash flow opportunities, and tax advantages—just to name a few.

This is especially true for Iowans. Our state (the City of Altoona, in particular) is ripe with these opportunities.

If you want to succeed in commercial real estate in Iowa, you’d be wise to look into Altoona investment properties.

Why? Altoona has a business-friendly climate, and plentiful land and development properties. We’re an emerging leader in Iowa economic development and a hotbed for optimal ROI.

Before you start chasing down Altoona’s commercial real estate opportunities, though, you’ll want to make sure you have a good grasp on the fundamentals of the industry. Don’t worry, you’ll catch on quick.

Here are some key things to know about commercial real estate.

What is Commercial Real Estate?

Commercial real estate is property that’s used for business purposes, such as office buildings, warehouses, apartment buildings, storefronts, etc.

Typically, a real estate investor will purchase one of these investment properties and then lease it out to tenants (usually businesses), in order to cover financing costs and eventually turn a profit.

Different Types of Commercial Real Estate

The term “commercial real estate” (also known as “business real estate”) can be used to describe a lot of different properties, from small storefronts to massive fulfillment centers.

Even across their wide range of uses, these investment properties fall into distinct categories.

  • Multifamily Rental:
    • Duplexes, apartment communities, high-rise buildings, etc.
  • Office:
    • High-rise office buildings, corporate parks, etc.
  • Industrial:
  • Retail:
    • Shopping centers, malls, strip malls, etc.
  • Hotels/Hospitality:
    • Hotel chains, boutique hotels, resorts, etc.
  • Mixed-Use:
    • Any combination of different categories. For example, apartment buildings with retail units, industrial buildings with office space, etc.
  • Land:
    • Development land, agricultural land, and other types of land that can be leased/sold.
  • Special Purpose:
    • Miscellaneous properties like parking garages, amusement parks, stadiums, and others—typically owned and constructed by the investor.

If you want to learn more about business real estate sub-categories and specifics, you can find a great article here.

Commercial Property Classifications (Class A, B, and C)

When learning more about the commercial real estate industry, you’ll hear the terms “Class A”, “Class B”, and “Class C” being used to describe different properties.

What are they? They’re basically “letter grades” that indicate the quality of commercial real estate, with “Class A” properties being the most desirable and “Class C” being the least.

Keep in mind that these are “internal” classifications, only really used by commercial real estate brokers and investors themselves. You wouldn’t want to put “Class B property” on a listing.

Typically, these classifications are used as a shorthand method of understanding a property’s risk vs. reward, along with other investment factors.

For example, a lower-class building can be easier and cheaper to purchase, but it may come with extensive renovation costs down the road. On the other hand, a higher-class building will draw in high-paying tenants but will come with higher operating costs.

It should be noted that these classifications can vary from region to region, as different cities may have different standards, even in their own submarkets.

You can learn more about these classifications in detail here.

Class A Properties: Most Desirable

Class A commercial properties are the most desirable in their market areas. They’re typically new (built in the last 10-15 years), in highly desirable locations (growing areas), and have little to no maintenance or renovation needs.

These properties often have high-earning, creditworthy tenants, usually charging the highest rent in the area.

Class B Properties: In the Middle

Class B properties are in between being the most and least desirable—they’re good, but not the best. These properties are slightly older (typically built 15-20 years ago), in good condition, and may have a few maintenance/renovation needs.

These commercial properties will usually have average-earning tenants, charging rent that floats around the market average. However, it should be noted that Class B properties can sometimes be upgraded into a Class A status through renovations, remodels, and market growth.

Class C Properties: Least Desirable

Class C commercial properties are the least desirable, but that doesn’t mean they’re not worthy investments. Often, they’re just older buildings (built more than 20-30 years ago) that need extensive renovations and maintenance.

They do offer advantages when it comes to cost. They’re cheaper to purchase and typically have the lowest rent in the area for tenants. However, it should be noted that upgrading these buildings (or even keeping them up to code in some cases) can add substantial costs later on.

Loan and Lease Options

Obviously, the primary desired outcome of investing in commercial real estate is turning a profit through tenant leasing. To succeed, you’ll need to know how to purchase a property, and how to rent it out effectively.

Here’s a very brief overview of some options.

Commercial Property Loans—Purchasing Your Property

U.S. Small Business Administration Loans (SBA Loans)

  • Up to $14 million in financing
  • Relatively low interest rates, with secure government backing
  • May have lengthy approval processes due to qualifying criteria screenings

Bridge Loans and Hard Money Loans

  • Short-term loans, much quicker and more accessible than SBA or mortgage loans
  • Carry higher interest rates
  • Good for financing the initial property purchase, before securing long-term financing

Permanent Loans (Mortgage Loans)

  • Great long-term financing options, offered by most commercial lenders
  • Modest interest rates, similar to home mortgage loans
  • May also have lengthy approval processes and stringent qualifications

You can learn more about loan options in our blog post, “A Beginner’s Guide to Investment Property Loans”.

Tenant Leasing Options—Generating Revenue

Gross (Full-Service) Leases

  • Fixed cost for tenants, more control for landlords (investors)

Net Leases

  • More flexibility for tenants, less risk for landlords

Modified Gross Leases

  • Middle-ground between gross and net leases, with tenants and the landlord agreeing on how to cover operating expenses

You can learn more about these lease options in our blog post, “What Are the 3 Types of Commercial Real Estate Leases?”.

Finding Commercial Real Estate in Iowa

Looking for investment properties or commercial real estate for sale in Iowa? One of the leaders in Iowa economic development is the City of Altoona, a community just minutes east of Des Moines.

We’re equipped with the leaders, economic tools, utilities, and infrastructure needed to foster long-term development and mutually beneficial commercial real estate partnerships. Plus, Altoona development opportunities are often supported by exciting incentives, grants, and tax credits.

Over the last two decades, Altoona has experienced significant growth, and there are currently numerous opportunities for investors looking to purchase properties or developers looking to build.

Search our commercial property database or request additional information to learn more.