Real Estate Articles

Real estate refers to immovable property, that is, land and improvements (buildings) to the land, or in broader terms, land and anything permanently affixed to it. The term real estate is commonly used interchangeably with the term real property, or just property. The term real property, strictly used, refers to the ownership rights of use, control and disposition of real estate.

Given the definition of real estate it can be categorized in terms of types of buildings, such as residential, office, retail, industrial, hospitality/leisure, religious, educational, health, etc. From an investment point of view, most favorite property types in the institutional investment community are those that can be used by businesses (such as office buildings, retail space, industrial buildings and hospitality/leisure facilities) as well as apartment buildings. These properties are preferred by investors for their income-producing ability, as they can be rented to businesses and households, thus providing a cash flow to their owners.

Office

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There are variations in terms of building types within each category of investment property. In the case of office property, there is not that much variation in terms of building types. Major distinctions concern the quality of the buildings, their age and technological obsolescence. Real estate professionals typically refer to three different classes of office buildings: A, B and C.

Class A office buildings are characterized by high quality materials and modern design. In addition, they are fully equipped with latest technologies and required infrastructure. Class A office buildings are newly built or have qualities that allow them to compete with newly-built office structures. The Urban Land Institute Office Development Handbook introduces some additional dimensions in their definition of Class A space, such as excellent location and access, high quality tenants, and professional management.

Class B buildings are of good quality and design, but are older buildings and are characterized by some functional obsolescence and deterioration. Class C buildings are typically 15 to 25 years old and are characterized by non-negligible functional and technological obsolescence, as well as physical deterioration. Furthermore, in many cases Class C office space is found in structures that are not truly office buildings, but rather walk-up office spaces above retail or service businesses. Office space is primarily used by companies in the service, finance, insurance and real estate sectors.

Retail

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Retail space is used by retailers who sell goods and services. Goods and services sold by retailers can be classified into four major categories, based on how homogeneous they are and how frequently they are purchased (see Carn et al., 1988):

� Convenience goods, representing standardized goods bought at high frequency from the store located closest to the consumer (food, drugs, etc.)

� Shopping goods, representing less standardized goods that are purchased less frequently and involve some comparison-shopping (furniture, clothing, etc.)

� Personal services, representing services purchased often from the store most conveniently located with respect to the consumer (shoe repair, dry cleaning, etc.)

� Specialized services, representing services that are bought less frequently and involve some comparison shopping (insurance, travel, etc.)

Product heterogeneity and frequency of purchase can help us understand how traditional shopping center formats have arisen and how they locate with respect to the consumers. The most commonly found shopping center formats include:

� Neighborhood shopping centers, which are usually anchored by a supermarket or a drugstore and include a small collection of other stores selling convenience goods or personal services. Since these stores are selling goods and services purchased with high frequency, they are located close to consumer concentrations and draw the majority of their customers from a small area around their location (within a driving distance of 15 minutes). In other words, their primary trade area is small. The typical size of neighborhood centers ranges between 50,000 and 100,000 square feet.

� Community shopping centers, which are usually anchored by a discount store, junior department store, or a variety store, and comprise stores that offer mostly convenience goods, personal services, and, perhaps, some shopper�s goods (furniture and clothing) or specialized services. Their typical size ranges from 120,000 to 400,000 square feet, and their area of influence ex-tends to about a 30-minute drive from their location.

� Power centers, which include national tenants advertising heavily on television. Their size ranges from 150,000 to 300,000 square feet, and their area of influence extents up to a 40-minute drive from their location.

� Regional shopping centers, which are typically anchored by one or two full-line department stores and offer a wide range of shopper goods and specialized services, as well as some convenience goods. They typically include recreational facilities, and their size ranges from 800,000 to 2,000,000 square feet. Their area of influence extends up to a 45-60 minute drive from their location.

� Super-regional shopping centers, which are typically anchored by three full-line department stores and offer a wider range of shopper goods and specialized services, including recreational facilities. Their size is usually greater than 2,000,000 square feet, and their area of influence extends up to a 60-minute drive from their location.

Power centers represent a somewhat newer retail format, relative to the other four. Although the aforementioned typologies of retail centers are commonly found, retail center formats are often being challenged, as retailers and developers seek strategies and shopping environment settings that will enable them to increase market share. For example, some other retail-center formats include super-neighborhood centers, which are neighborhood centers with larger anchors, off-price centers selling higher-end brand-name products at considerably reduced prices, and outlet centers, which represent a collection of outlet factory stores.

The structure of retail leases, which typically include a percentage of store sales, provides a significant inducement to developers/investors for optimizing a center�s design and tenant mix and venturing into new retail formats. Schmitz and Brett (2001) indicate that shopping center types are becoming less distinct as tenants typically found in regional malls venture into other center formats, and vice versa. Furthermore, hybrid formats targeting specific market segments are emerging.

Industrial

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Industrial real estate includes warehouses, distribution and logistics centers as well as production space. These buildings are the least complicated to build and for this reason they can be build in relatively short time compared to offices and retail. In this way supply can respond faster to changes in demand. These dynamics help avoid significant imbalances between demand and supply. For this reason, the historical performance of industrial property investments has been less volatile than the performance of investments in office and retail, and that is why this property type is considered generally by investors as less risky than the other two commercial property types.

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