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CFA Level II Exam · Overview of Types of Real Estate Investment

Real Estate Property Types and Characteristics

Updated 7 October 2026 · Fact-checked

Real estate property types are the main sectors of commercial property: residential (multifamily), office, retail, industrial, and others such as hotels and storage. Each has its own lease structure, demand drivers and risks. To answer an item-set question, match the vignette's facts to the sector, then judge income stability and risk.

Understand Real Estate Property Types and Characteristics

Real estate is not one asset. A block of apartments, an office tower, a mall and a warehouse earn income in different ways and react differently to the economy. Your job in the exam is to read a short description and say which risks matter most.

Start with the sectors. Residential (multifamily) means apartment buildings with many tenants. Leases are short, often 6 to 12 months, so rent resets quickly. Demand follows household formation, population growth, employment and the cost of owning versus renting. Many small leases spread tenant risk, but income moves quickly in a downturn.

Office property has longer leases, often several years. Demand follows white-collar employment and space needed per worker. Risks are vacancy, rent concessions and the cost of re-leasing space, such as tenant improvements and leasing commissions. Remote work can lower space demand. Retail includes malls and shopping centres. Leases often include a base rent plus percentage rent, a share of tenant sales above a threshold. Demand follows consumer spending, and e-commerce is a structural risk. An anchor tenant matters a lot.

Industrial property includes warehouses, distribution and logistics space. Leases are typically long and demand follows trade, manufacturing and e-commerce. Buildings are simple, so capital spending is often lower. Other types include hotels (income resets daily, so it is the most cyclical), self-storage, data centres, healthcare and student housing.

Lease structure decides who carries operating costs. In a gross lease the tenant pays a fixed rent and the landlord pays property taxes, insurance and maintenance. In a net lease the tenant pays some or all of these on top of rent. The more the tenant pays, the more stable the landlord's net operating income (NOI) is against cost inflation. Also look at lease length, escalation clauses, and how many leases expire at the same time.

Key formulas to remember

Net operating income (NOI)
NOI = Rental income + other income − vacancy and collection loss − operating expenses
Operating expenses exclude depreciation, interest and income taxes. Under a gross lease the landlord bears more expenses, so NOI is more exposed to cost increases.
Gross lease vs net lease
Gross: landlord pays operating costs. Net: tenant pays some or all of them.
Single net, double net and triple net leases move more costs to the tenant, in that order. Triple net passes taxes, insurance and maintenance.
Percentage rent
Rent = Base rent + % × (Tenant sales − breakpoint sales)
Common in retail. It gives the landlord upside from tenant sales but ties income to consumer spending.
Occupancy rate
Occupancy = Occupied space ÷ Total leasable space
Vacancy = 1 − occupancy. Compare it with the market, not in isolation.

How to solve Real Estate Property Types and Characteristics questions

Use this method for any item-set question on property types, leases or risks.

  1. 1Identify the property type from the vignette: tenant mix, lease length, location and building features.
  2. 2Note the lease structure: gross or net, base rent only or with percentage rent, and escalation clauses.
  3. 3Find the demand driver that matters for that type, such as employment, household formation, consumer spending or trade volumes.
  4. 4Check lease expiry dates, tenant concentration and anchor tenants. Short or clustered expiries mean higher income risk.
  5. 5Decide who bears operating cost risk and inflation risk under the lease, landlord or tenant.
  6. 6Link the facts to the risk asked about: vacancy, re-leasing cost, obsolescence, cyclicality or structural change.
  7. 7Choose the option that follows from the vignette facts, not from general opinion about the sector.

Quickest way: Three-question scan

When to use it: When you have little time and the question asks which property or lease has more or less risk.

  1. Ask how fast can income reset: short leases (apartments, hotels) reset fast and are more cyclical.
  2. Ask who pays costs: more tenant-paid costs means steadier NOI.
  3. Ask what long-term threat the sector faces: remote work for office, e-commerce for retail.
  4. Pick the option that fits all three answers.

Common mistakes in Real Estate Property Types and Characteristics

  • Saying a gross lease protects the landlord from expense inflation.

    The word gross sounds like more income for the landlord.

    Fix: In a gross lease the landlord pays operating costs from a fixed rent. Net leases pass costs to the tenant.

  • Treating all property sectors as equally cyclical.

    Students memorise real estate as one asset class.

    Fix: Rank by lease length. Hotels and apartments reset fastest and are most cyclical. Long-lease industrial and net-leased property are steadier.

  • Assuming short multifamily leases mean high risk of default.

    Short lease length is confused with tenant credit risk.

    Fix: Short leases mean income resets quickly, in both directions. Many small tenants actually diversify credit risk.

  • Ignoring tenant concentration and anchor tenants in retail and office.

    Students focus on the headline occupancy figure.

    Fix: Read who the tenants are. A high occupancy rate with one large tenant can still be high risk.

  • Including depreciation or interest in NOI.

    NOI is mixed up with net income.

    Fix: NOI excludes depreciation, financing costs and income taxes.

Worked examples

Example 1

Vignette: A fund considers two properties. Property A is a 200-unit apartment block with 12-month leases and 95% occupancy. Property B is a warehouse leased to one logistics tenant on a 10-year triple net lease. Q1: Which property's NOI is less exposed to rising property taxes? Q2: Which property can reprice rents faster if market rents rise?

Show the solution
  1. Q1: Under a triple net lease the tenant pays taxes, insurance and maintenance. Property B's landlord is shielded from rising property taxes.
  2. Property A has an unspecified lease type, but a standard apartment lease leaves the landlord with most costs, so it is more exposed.
  3. Q2: Repricing speed depends on lease length. Property A's leases expire every 12 months, so rents can reset within a year.
  4. Property B's rent is locked for 10 years unless it has escalation clauses.

Answer: Q1: Property B. Q2: Property A.

Example 2

Vignette: A regional mall has a base rent of ₹1,200 per sq m per year for a tenant with 500 sq m of space. The lease adds percentage rent of 5% of sales above a breakpoint of ₹60,00,000. Tenant sales this year are ₹80,00,000. Q1: What is the total rent this year? Q2: Which risk does the percentage rent expose the landlord to?

Show the solution
  1. Q1: Base rent = ₹1,200 × 500 = ₹6,00,000.
  2. Sales above breakpoint = ₹80,00,000 − ₹60,00,000 = ₹20,00,000.
  3. Percentage rent = 5% × ₹20,00,000 = ₹1,00,000.
  4. Total rent = ₹6,00,000 + ₹1,00,000 = ₹7,00,000.
  5. Q2: Part of the income depends on tenant sales, so the landlord is exposed to consumer spending and to competition such as e-commerce.

Answer: Q1: ₹7,00,000. Q2: Exposure to tenant sales, meaning consumer spending and e-commerce risk.

Exam tips

  • Expect vignettes that describe a property in two or three sentences. Underline lease length, lease type and tenant mix before reading the options.
  • Questions often ask who bears a cost or risk, landlord or tenant. Answer from the lease wording.
  • When a question gives sector and cycle, lease length is usually the key to which option is right.
  • Percentage rent and NOI calculations are simple arithmetic. Do them in order: base rent, excess over breakpoint, percentage, total.
  • There is no penalty for wrong answers, so always pick an option.

Real Estate Property Types and Characteristics in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Real Estate Property Types and Characteristics: frequently asked questions

What is the difference between a gross lease and a net lease?

In a gross lease the tenant pays a fixed rent and the landlord pays operating costs such as taxes, insurance and maintenance. In a net lease the tenant pays some or all of these costs in addition to rent. Net leases make the landlord's NOI more stable.

Which property type is most cyclical?

Hotels are usually the most cyclical because room rates reset daily. Multifamily is next because leases are short. Industrial and long-lease net-leased property tend to be steadier.

What are the main risks of retail property?

Tenant sales depend on consumer spending, and e-commerce is a structural threat. Anchor tenant loss can hurt the whole centre. Percentage rent ties landlord income to tenant sales.

Does NOI include depreciation and interest?

No. NOI is income after vacancy and operating expenses only. Depreciation, interest and income taxes are excluded.