Commercial Real Estate 101- Asset Classes and Investment Hypotheses

Written by: Lucro Staff 8 months ago

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Commercial real estate is broadly defined as any property that generates a profit through income in addition to capital appreciation. Income is earned through the leasing out of the property, while appreciation is captured at disposition. Millions of people have invested in commercial real estate over the years – and not everyone is an expert.

Before you decide to invest in commercial real estate, it’s important that you have a grasp on the basics. In this article, we’re going to give you a better understanding of commercial real estate 101, so you can make smart investments in your financial future.

Asset Classes

Asset Classes, when used in the commercial real estate context, are not referring to things like stocks and bonds like in traditional finance. Instead, when CRE professionals discuss asset classes they’re referring to the different types of commercial property. There are four main asset classes in CRE: multifamily, retail, office, and industrial. Beyond that, there is also hospitality, self-storage, healthcare, and a near limitless supply of specialty buildings. Below, we’ll focus on the four big ones.

Investment Hypotheses

An investment hypothesis is simply a shorthand explanation of what the buyer intends to do with the asset. In commercial real estate, there are three basic investment hypotheses:

 

Commercial real estate investors will often create pro forma forecasts for several investment hypotheses when considering an investment, to see which option will give them the best return. Savvy firms unlock hidden value by modeling several scenarios and by thinking of creative ways to structure their deals.

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