Commercial property, also called commercial real estate, investment property or income property, is real estate (buildings or land) intended to generate a

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

, either from

capital gain Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. ...

s or

rental Renting, also known as hiring or letting, is an agreement where a payment is made for the use of a good, service or property owned by another over a fixed period of time. To maintain such an agreement, a rental agreement (or lease) is sign ...

income. Commercial property includes

office building An office is a space where the employees of an organization perform administrative work in order to support and realize the various goals of the organization. The word "office" may also denote a position within an organization with specific du ...

s, medical centers,

hotel A hotel is an establishment that provides paid lodging on a short-term basis. Facilities provided inside a hotel room may range from a modest-quality mattress in a small room to large suites with bigger, higher-quality beds, a dresser, a re ...

s, malls, retail stores, multifamily housing buildings,

farm land A farm (also called an agricultural holding) is an area of land that is devoted primarily to agricultural processes with the primary objective of producing food and other crops; it is the basic facility in food production. The name is used fo ...

warehouse A warehouse is a building for storing goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial parks on the rural–urban fringe, out ...

s, and garages. In many

U.S. state In the United States, a state is a constituent political entity, of which there are 50. Bound together in a political union, each state holds governmental jurisdiction over a separate and defined geographic territory where it shares its so ...

residential property A residential area is a land used in which housing predominates, as opposed to industrial and commercial areas. Housing may vary significantly between, and through, residential areas. These include single-family housing, multi-family resident ...

containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes. Commercial buildings are

building A building or edifice is an enclosed Structure#Load-bearing, structure with a roof, walls and window, windows, usually standing permanently in one place, such as a house or factory. Buildings come in a variety of sizes, shapes, and functions, a ...

s that are used for

commercial Commercial may refer to: * (adjective for) commerce, a system of voluntary exchange of products and services ** (adjective for) trade, the trading of something of economic value such as goods, services, information or money * a dose of advertising ...

purposes, and include

s, and

retail Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is the sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholes ...

buildings (e.g.

convenience store A convenience store, convenience shop, bakkal, bodega, corner store, corner shop, superette or mini-mart is a small retail store that stocks a range of everyday items such as convenience food, groceries, beverages, tobacco products, lotter ...

s, ' big box' stores, and

shopping mall A shopping mall (or simply mall) is a large indoor shopping center, usually Anchor tenant, anchored by department stores. The term ''mall'' originally meant pedestrian zone, a pedestrian promenade with shops along it, but in the late 1960s, i ...

s). In urban locations, a commercial building may combine functions, such as

office An office is a space where the employees of an organization perform Business administration, administrative Work (human activity), work in order to support and realize the various goals of the organization. The word "office" may also denote a po ...

s on levels 2–10, with retail on floor 1. When space allocated to multiple functions is significant, these buildings can be called multi-use. Local authorities commonly maintain strict regulations on commercial zoning, and have the authority to designate any zoned area as such; a business must be located in a

commercial area Commercial area, commercial district or commercial zone in a city is an area, district, or neighborhoods primarily composed of commerce, commercial buildings, such as a strip mall, business parks, office parks, downtown, central business distric ...

or area zoned at least partially for commerce.

Types of commercial property

Commercial real estate is commonly divided into six categories: #

Office building An office is a space where the employees of an organization perform administrative work in order to support and realize the various goals of the organization. The word "office" may also denote a position within an organization with specific du ...

s – This category includes single-tenant properties, small professional office buildings, downtown skyscrapers, and everything in between. # Retail Shops/

Restaurant A restaurant is an establishment that prepares and serves food and drinks to customers. Meals are generally served and eaten on the premises, but many restaurants also offer take-out and Delivery (commerce), food delivery services. Restaurants ...

s – This category includes pad sites on highway frontages, single tenant retail buildings, inline multi-tenant retail, small neighborhood shopping centers, larger community centers with grocery store anchor tenants, lifestyle centers that blend both indoor and outdoor shopping, "power centers" with large anchor stores such as Best Buy, PetSmart, OfficeMax, and

Shopping Malls A shopping mall (or simply mall) is a large indoor shopping center, usually anchored by department stores. The term ''mall'' originally meant a pedestrian promenade with shops along it, but in the late 1960s, it began to be used as a generi ...

that usually house many indoor stores. #

Multifamily residential Multifamily residential, also known as multidwelling unit (MDU), is a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. Units can ...

– This category includes apartment complexes or high-rise apartment buildings. Generally, anything larger than a fourplex is considered commercial real estate. #Land – This category includes investment properties on undeveloped, raw, rural land in the path of future development. Or, infill land with an urban area, pad sites, and more. #Industrial - This category includes warehouses, large R&D facilities, cold storage or

cold chain A cold chain is a supply chain that uses refrigeration to maintain perishable goods, such as pharmaceuticals, produce or other goods that are temperature-sensitive. Common goods, sometimes called cool cargo, distributed in cold chains include fr ...

properties, and distribution centers. #Miscellaneous – This catch all category would include any other nonresidential properties such as hotel, hospitality, medical, and self-storage developments, as well as many more. Of these, only the first five are classified as being

commercial building Commercial may refer to: * (adjective for) commerce, a system of voluntary exchange of products and services ** (adjective for) trade, the trading of something of economic value such as goods, services, information or money * a dose of advertising ...

s. Residential income property may also signify multifamily apartments.

Investment

The basic elements of an

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

are cash inflows, outflows, timing of cash flows, and risk. The ability to analyze these elements is key in providing services to investors in commercial real estate.

Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment. An example of this sort of investment is a real estate fund. Cash inflows include the following: *Rent *Operating expense recoveries *Fees: Parking, vending, services, etc. * Proceeds from sale * Tax Benefits * Depreciation * Tax credits (e.g., historical) Cash outflows include: * Initial investment (down payment) * All operating expenses and taxes * Debt service (mortgage payment) * Capital expenses and tenant leasing costs Costs upon sale The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year-over-year. It is important to be able to predict the probability that the cash inflows and outflows will be in the amounts predicted, what is the probability that the timing of them will be as predicted, and what the probability is that there may be unexpected cash flows, and in what amounts they might occur. The total value of commercial property in the United States was approximately $6 trillion in 2018. The relative strength of the market is measured by the US Commercial Real Estate Index which is composed of eight economic drivers and is calculated weekly. According to Real Capital Analytics, a New York real estate research firm and subsidiary of

MSCI MSCI Inc. (formerly Morgan Stanley Capital International) is an American finance company headquartered in New York City. MSCI is a global provider of equity, fixed income, real estate indices, multi-asset portfolio analysis tools, ESG and ...

, more than $160 billion of commercial properties in the United States are now in default,

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...

, or

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

. In 2024, office leasing volume rose to its highest level since 2020, but roughly 60% of active office leases went into effect prior to the pandemic. In Europe, approximately half of the €960 billion of debt backed by European commercial real estate is expected to require

refinancing Refinancing is the replacement of an existing debt obligation with another debt obligation under a different term and interest rate. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic ...

in the next three years, according to PropertyMall, a UK‑based commercial property news provider. Additionally, the economic conditions surrounding future interest rate hikes; which could put renewed pressure on valuations, complicate loan refinancing, and impede debt servicing could cause major dislocation in commercial real estate markets. However, the contribution to Europe's economy in 2012 can be estimated at €285 billion according to EPRA and INREV, not to mention social benefits of an efficient real estate sector. It is estimated that commercial property is responsible for securing around 4 million jobs across Europe. As of April 2025, commercial real estate confidence experienced its sharpest drop since the

COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...

amid the Trump Administration's latest

tariff A tariff or import tax is a duty (tax), duty imposed by a national Government, government, customs territory, or supranational union on imports of goods and is paid by the importer. Exceptionally, an export tax may be levied on exports of goods ...

policies, with positive sentiment falling from 126.5% in the latter half of 2024 to 87.9%, according to the 1Q 2025 Board of Governors Sentiment Index.

Commercial property transaction process (deal management)

Typically, a

broker A broker is a person or entity that arranges transactions between a buyer and a seller. This may be done for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither ...

will market a property on behalf of the seller. Brokers representing buyers or buyers' representatives identify property meeting a set of criteria set out by the buyer. Types of buyers may include an owner-user, private investor, acquisitions, capital investment, or

private equity firms A private equity firm or private equity company (often described as a financial sponsor) is an investment management company that provides financial backing and makes investments in the private equity of a startup or of an existing operating com ...

. The buyer or its agents will perform an initial assessment of the physical property, location and potential profitability (if for investment) or adequacy of property for its intended use (if for owner-user). If it is determined the prospective investment meets the buyer's criteria, they may signal their intent to move forward with a letter of intent (LOI). Letters of Intent are used to outline the major terms of an offer in order to avoid unnecessary costs of drafting legal documents in the event the parties do not agree to the terms as drafted. Once a Letter of Intent is signed by both parties, a

purchase and sale agreement A purchase and sale agreement (PSA), also called a sales and purchase agreement (SPA) or an agreement for purchase and sale (APS), is an agreement between a buyer and a seller of real estate property, company stock, or other assets. The person, ...

(PSA) is drafted. Not all commercial property transactions utilize a Letter of Intent although it is common. A PSA is a legal agreement between the seller and a single interested buyer which establishes the terms, conditions and timeline of the sale between the buyer and seller. A PSA may be a highly negotiated document with customized terms or may be a standardized contract similar to those used in residential transactions. Once a PSA is executed, the buyer is commonly required to submit an

escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transact ...

deposit, which may be refundable under certain conditions, to a title company office or held by a brokerage in escrow. The transaction moves to the

due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. Due diligence ...

phase, where the buyer makes a more detailed assessment of the property. Purchase and sale agreements will generally include clauses which require the seller to disclose certain information for buyer's review to determine if the terms of the agreement are still acceptable. The buyer may have the right to terminate the transaction and/or renegotiate the terms, often referred to as "contingencies". Many purchase agreements are contingent on the buyer's ability to obtain

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

financing and buyer's satisfactory review of specific due diligence items. Common due diligence items include property

financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

, rent rolls,

vendor In a supply chain, a vendor, supplier, provider or a seller, is an enterprise that contributes goods or services. Generally, a supply chain vendor manufactures inventory/stock items and sells them to the next link in the chain. Today, these term ...

contracts, zoning and legal uses, physical and environmental condition, traffic patterns and other relevant information to the buyer's purchase decision specified in the PSA. In competitive real estate markets, buyers may waive contingencies in order to make an offer more appealing to a buyer. The PSA will usually require the seller to provide due diligence information to the seller in a timely manner and limit the buyer's time to terminate the deal based on its due diligence review findings. If the buyer terminates the transaction within the due diligence timeframe, the escrow deposit is commonly returned to the buyer. If the buyer has not terminated the agreement pursuant to the PSA contingencies, the escrow deposit becomes non-refundable and failure to complete the purchase will result in the escrow deposit funds to be transferred to the seller as a fee for failure to close. The parties will proceed to close the transaction in which funds and title are exchanged. When a deal closes, post-closing processes may begin, including notifying tenants of an ownership change, transferring vendor relationships, and handing over relevant information to the asset management team.

References

External links

* {{DEFAULTSORT:Commercial Property

Types of commercial property

Investment

Commercial property transaction process (deal management)

See also

Further reading

References

External links