What is Commercial Real Estate?
Commercial real estate (CRE) encompasses properties used for business purposes rather than residential living. The major CRE categories include office buildings, retail spaces, industrial/warehouse facilities, multifamily apartments (5+ units), hotels/hospitality, and special-purpose properties (medical, self-storage, data centers). CRE is distinguished from residential real estate primarily by its valuation method, lease structure, and financing.
CRE is valued based on the income it produces, not comparable sales. The income approach (NOI / cap rate) is the standard. This means CRE investors can directly increase a property's value by increasing NOI through higher rents, lower vacancy, or reduced expenses. This forced appreciation capability is one of the primary attractions of commercial investing.
Commercial lease types
Gross lease: Tenant pays a flat rent. Landlord covers all operating expenses (taxes, insurance, maintenance, utilities). Common in office and smaller retail.
Modified gross: Base rent plus the tenant pays some expenses (often utilities and janitorial). A middle ground between gross and net leases.
Triple net (NNN): Tenant pays base rent plus property taxes, insurance, and common area maintenance. The landlord's income is nearly pure profit. Most stable for landlords. Common in retail and single-tenant industrial.
Commercial financing
CRE loans differ from residential: 25-30% down payment, 5-10 year terms with 20-25 year amortization (creating a balloon payment at term end), underwriting focused on property income (DSCR of 1.20-1.25 minimum), higher rates than residential, and recourse or non-recourse depending on loan size and borrower strength.
CRE and wholesalers
While most wholesalers focus on residential properties, some specialize in smaller commercial deals: strip malls, small office buildings, and mixed-use properties. Commercial wholesale requires different buyer pools (institutional investors, 1031 exchange buyers) and different analysis (income-based rather than comp-based). The spreads can be larger on commercial deals, but the buyer pool is smaller and more sophisticated.