Commercial Real Estate Investing

Commercial real estate covers a wide set of property types, retail, industrial, multifamily, office, medical, self-storage, each with its own leasing conventions, tenant profile, and risk drivers. An investor moving from residential rentals into commercial property, or exiting a residential holding into a commercial replacement through a 1031 exchange, is stepping into a different set of underwriting questions than a single-family purchase requires.

Retail properties range from single-tenant net-lease buildings to multi-tenant shopping centers, with lease terms and tenant credit quality varying widely between the two. Industrial covers warehouse and distribution space, generally longer leases and lower turnover than retail. Multifamily properties above four units are financed and underwritten as commercial assets rather than residential. Office space carries tenant improvement costs and lease structures that shifted meaningfully after remote work changed space demand. Medical office and self-storage each have their own tenant stickiness and operating cost profile that set them apart from the broader commercial category.

An investor new to commercial property often assumes the classes behave similarly because they're grouped under one label, but the underwriting drivers barely overlap: a self-storage facility lives or dies on local unit demand and drive-up access, while an industrial building's value hinges on ceiling height, dock doors, and proximity to a distribution corridor.

Capitalization rate, net operating income divided by purchase price, gives a quick comparison across properties, but it says nothing about lease rollover risk, deferred maintenance, or how the local submarket is trending. A property with a slightly lower cap rate but long-term leases to credit tenants can be a safer position than a higher cap rate property with leases expiring in the next two years.

Comparing cap rates across different asset classes is also misleading on its own, since industrial and multifamily properties in a given market often trade at meaningfully different cap rates than retail or office, reflecting different perceived risk and demand rather than one class simply being a better deal than another.

Commercial loans are typically underwritten against the property's income rather than the borrower's personal income alone, use shorter amortization schedules with a balloon payment, and often require a debt service coverage ratio above a set threshold. Loan terms and lender appetite vary more by property type and market than they do in residential lending, which is part of why financing timelines on a commercial purchase can run longer than a residential deal.

Single-tenant net-lease properties, common in retail and industrial, put property taxes, insurance, and maintenance on the tenant rather than the landlord, which produces a more predictable income stream for the owner but usually at a lower cap rate than a property where the landlord retains those responsibilities.

Every category above, net-lease retail, industrial, multifamily, medical office, self-storage, shows up regularly as 1031 replacement property, both as direct purchases and as the underlying assets in DST offerings. An investor selling appreciated property in Aspen or the valley and researching commercial real estate for the first time is often doing so specifically because it's the pool of eligible replacement inventory for an upcoming exchange, not because commercial property was the original plan.