What Makes Commercial Real Estate “Commercial”
Commercial real estate (CRE) is property used primarily to support a business activity or to produce income from tenants operating businesses. Compared with many small residential rentals, CRE decisions are often driven less by “what a typical household wants” and more by cash flow and tenant business health: can the tenant generate enough revenue in that space, at that location, to reliably pay rent and stay open?
Two practical ideas guide most CRE analysis:
- Space use drives value: The same building can be valuable or weak depending on whether its layout, access, and zoning fit the tenant’s operations.
- Tenant economics drive demand: A tenant’s sales, margins, staffing needs, and customer patterns influence how much rent they can afford and what lease terms they need.
High-level lease vocabulary (no legal deep dive)
Commercial leases vary widely, but you will often hear these concepts:
- Base rent: The core rent paid for the space.
- Operating expense recovery (OPEX): How building operating costs are paid—by landlord, tenant, or shared.
- NNN / net charges (common concept): Tenants pay some combination of property taxes, insurance, and maintenance in addition to base rent.
- Tenant improvements (TI): Build-out costs to make the space usable for the tenant (who pays, how much, and when).
- Term and options: How long the lease lasts and whether the tenant can extend.
- Rent bumps: Scheduled increases (fixed, percentage, or tied to an index).
- Use clause: What the tenant is allowed to do in the space (important for compatibility and risk).
Major operating cost categories you’ll see across CRE
Even though each property type has its own cost profile, most CRE operating costs fall into these buckets:
- Property taxes
- Property insurance
- Utilities: electric, gas, water/sewer, trash (sometimes tenant-metered)
- Repairs & maintenance: plumbing, electrical, doors, dock equipment, etc.
- Common area maintenance (CAM): parking lots, landscaping, snow removal, lighting, security
- Building systems: HVAC, elevators, fire/life safety systems
- Janitorial and cleaning
- Management and accounting
- Capital expenditures (CapEx): roof, paving, major HVAC replacements (often planned separately from routine maintenance)
Office: Space for Knowledge Work and Client Interaction
How tenants use office space
Office tenants typically need space for employees to work, meet, and collaborate. Uses range from traditional professional services (accounting, legal) to medical-adjacent admin, call centers, and tech teams. The space must support productivity, privacy, and sometimes client-facing impressions.
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What makes locations work
- Access to labor: commute times, public transit, parking availability
- Client convenience: visibility, proximity to other businesses, easy navigation
- Building quality and amenities: lobby, elevators, security, shared conference rooms, nearby food
- Connectivity: reliable high-speed internet options and redundancy
Typical lease considerations (high level)
- Longer terms are common because office build-outs can be expensive and customized.
- TI allowances and build-out timelines matter: who pays for offices, conference rooms, wiring, and finishes.
- Expense structure: many offices share operating costs through some form of OPEX recovery.
- Parking rights: reserved spaces, ratios (spaces per 1,000 sq ft), validation for visitors.
Major operating cost categories (office emphasis)
- HVAC operation and maintenance (comfort is critical)
- Elevators and life-safety systems (in multi-story buildings)
- Common area cleaning and security
- Utilities in common areas; sometimes tenant electricity is separately metered
- Lobby/amenity upkeep (fitness center, conference facilities, etc.)
Retail: Space Where Sales and Foot Traffic Matter
How tenants use retail space
Retail tenants use space to sell goods or services directly to consumers. This includes restaurants, salons, gyms, convenience stores, boutiques, and service retail (cell phone stores, urgent care clinics in retail corridors). Layout supports customer flow, merchandising, and point-of-sale operations.
What makes locations work
- Visibility and signage: can customers see and recognize the store?
- Access and parking: easy entry/exit, sufficient parking, safe pedestrian paths
- Traffic generators: nearby anchors (grocery, big-box), schools, offices, dense housing
- Demographics and spending power: match between local customers and the tenant’s price point
- Co-tenancy and adjacency: complementary neighbors can boost visits (coffee next to offices; quick-serve near retail clusters)
Typical lease considerations (high level)
- Base rent plus shared costs: retail often includes CAM charges for parking lots, landscaping, lighting, and security.
- Percentage rent (sometimes): some leases add rent tied to sales above a threshold.
- Use restrictions and exclusives: a tenant may want protection from direct competitors in the same center.
- Hours of operation: especially in shopping centers to maintain consistent customer experience.
- Restaurant-specific items: grease traps, venting, outdoor seating rights, and utility capacity.
Major operating cost categories (retail emphasis)
- CAM: parking lot maintenance, striping, snow removal, landscaping, exterior lighting
- Roof and façade maintenance (often landlord-managed, cost recovered depending on lease)
- Trash and recycling (higher for food uses)
- Security and loss-prevention measures in common areas
- Utilities: sometimes tenant-paid directly, especially for in-line shops
Industrial: Space for Making, Storing, and Moving Goods
How tenants use industrial space
Industrial tenants use space for warehousing, distribution, light manufacturing, assembly, and “last-mile” delivery. The building must support efficient movement of goods: receiving, storage, picking/packing, and shipping.
What makes locations work
- Transportation access: proximity to highways, ports, rail, and airports depending on the business
- Truck functionality: turning radius, trailer parking, dock doors, yard depth
- Clear height and floor load: higher ceilings and strong floors improve storage and equipment options
- Power and utilities: sufficient electrical capacity for equipment; sometimes specialized needs (compressed air, water)
- Labor access: nearby workforce for warehouse shifts
Typical lease considerations (high level)
- Net-style expense structures are common because tenants often control their own operations and utility usage.
- Maintenance responsibilities: clarify who maintains docks, roll-up doors, and sometimes the roof/structure depending on the deal.
- Permitted use: manufacturing intensity, noise, outdoor storage, hazardous materials limitations.
- Expansion options: tenants may need additional bays or yard space as volume grows.
Major operating cost categories (industrial emphasis)
- Roof and building envelope (large roofs can be significant CapEx)
- Paving, yard maintenance, and drainage
- Dock equipment repairs (levelers, seals) and overhead doors
- Fire protection systems (sprinklers) and compliance testing
- Utilities: high electricity usage for lighting and equipment (often tenant-paid)
Hospitality: Space Sold by the Night
How tenants use hospitality space
Hospitality properties (hotels, limited-service, full-service, extended stay) generate revenue nightly rather than through long-term leases in the typical sense. Demand is tied to travel patterns: business travel, tourism, events, and local demand drivers (hospitals, universities, corporate campuses).
What makes locations work
- Demand generators: airports, convention centers, hospitals, tourist attractions, major employers
- Visibility and access: easy wayfinding, safe ingress/egress
- Competitive set: nearby hotels influence pricing and occupancy
- Brand fit: location must match the brand’s target guest and price point
Typical operating/contract considerations (high level)
- Management and brand agreements: many hotels are operated by a management company and may be affiliated with a brand that sets standards.
- Revenue mix: room revenue plus food & beverage, parking, resort fees, meeting space, etc.
- Capital planning: periodic renovations are common to stay competitive (soft goods and case goods refresh cycles).
Major operating cost categories (hospitality emphasis)
- Labor (front desk, housekeeping, maintenance)—often the largest cost
- Utilities (laundry, hot water, HVAC)
- Repairs & maintenance (high wear-and-tear)
- Marketing, distribution, and booking fees
- Property insurance and taxes
- Furniture, fixtures & equipment (FF&E) reserves and replacements
Multifamily (5+ Units): Residential Use, Commercial Ownership Lens
How tenants use multifamily space
Multifamily properties with 5+ units are often treated as commercial in financing and valuation because they are operated as a business: standardized units, recurring rent rolls, and professional management. Tenants use the space as homes, but the owner’s decisions focus on occupancy, rent levels, operating efficiency, and resident retention.
What makes locations work
- Convenience: access to jobs, schools, transit, and daily needs
- Safety and livability: lighting, neighborhood conditions, noise levels
- Unit mix and amenities: studios vs. 2-bed demand, laundry, parking, fitness, package handling
- Competing supply: nearby properties set the rent “ceiling” and amenity expectations
Typical lease considerations (high level)
- Shorter lease terms (often months to a year) with renewals; turnover is a key operational factor.
- Utility responsibility: tenant-paid vs. owner-paid; submetering where allowed.
- Rules and policies: pets, parking, noise, and shared amenity use (operationally important).
Major operating cost categories (multifamily emphasis)
- On-site management and staffing (or third-party management fees)
- Maintenance and unit turns (paint, flooring, cleaning, minor repairs)
- Utilities (especially if owner-paid water/sewer/trash)
- Insurance and property taxes
- Landscaping, snow removal, pool/amenity upkeep
- Bad debt and vacancy loss (economic costs tied to tenant payment and turnover)
Mixed-Use: Multiple Demand Drivers Under One Roof (or One Site)
How tenants use mixed-use space
Mixed-use combines two or more uses—commonly ground-floor retail with apartments above, or office with retail and structured parking. The goal is to create synergy: residents support retail; retail amenities support leasing; offices add daytime demand.
What makes locations work
- Walkability and connectivity: safe pedestrian routes between uses
- Parking strategy: shared parking can work if peak times differ (office daytime vs. residential nighttime)
- Noise and delivery management: loading zones and trash handling must not disrupt residents
- Strong site planning: clear wayfinding for customers, residents, and service vehicles
Typical lease considerations (high level)
- Separate lease structures by use: retail may have CAM; apartments have residential-style leases; offices may have OPEX recovery.
- Operating rules: delivery hours, trash routes, music/noise limits, patio use.
- Allocation of costs: define which costs belong to which component (e.g., shared roof sections, shared parking maintenance).
Major operating cost categories (mixed-use emphasis)
- Shared systems: roofs, elevators, parking structures, fire/life safety
- Security and access control (separating public retail from private residential areas)
- Cleaning and maintenance of common areas used by different groups
- Higher management complexity (multiple tenant types, multiple billing methods)
Comparing Property Types at a Glance
| Property type | Tenant success depends most on… | Location “must-haves” | Cost categories that often stand out |
|---|---|---|---|
| Office | Productivity, talent access, client experience | Commute, parking/transit, amenities, connectivity | HVAC, common areas, security, elevators |
| Retail | Customer traffic and conversion to sales | Visibility, access, parking, demographics, co-tenancy | CAM (parking/landscaping/lighting), trash, exterior upkeep |
| Industrial | Logistics efficiency and throughput | Highway access, docks/yard, clear height, power | Roof, paving/yard, dock equipment, fire systems |
| Hospitality | Occupancy and nightly rate driven by travel demand | Demand generators, visibility, competitive set | Labor, utilities, FF&E replacements, booking fees |
| Multifamily (5+) | Occupancy, rent levels, turnover control | Jobs access, livability, amenities, competing supply | Unit turns, management, utilities (if owner-paid) |
| Mixed-use | Synergy across uses and smooth operations | Walkability, parking plan, loading/trash design | Shared systems, security, complex cost allocation |
Guided Exercise: Match Tenants to Property Types and Site Features
Step 1: Match each tenant to the best property type
For each tenant below, choose one: Office, Retail, Industrial, Hospitality, Multifamily (5+), Mixed-use.
- A. A 3PL (third-party logistics) company that receives pallets daily and ships hundreds of packages per hour.
- B. A boutique fitness studio that relies on evening and weekend classes and impulse walk-ins.
- C. A regional accounting firm with 40 employees and frequent client meetings.
- D. An extended-stay operator targeting traveling nurses near a major hospital.
- E. A developer planning apartments above street-level restaurants and small shops.
- F. A 120-unit apartment community with on-site leasing and maintenance.
Step 2: Identify the top 3 site features that matter most (per tenant)
From the feature list below, pick the three most important for each tenant (A–F). You can reuse features.
- 1. Highway access and truck turning radius
- 2. Dock doors, yard depth, and trailer parking
- 3. Visibility from a main road and strong signage
- 4. Dense nearby population and complementary neighbors
- 5. Parking ratio and easy customer ingress/egress
- 6. Proximity to major employers and transit options
- 7. High-speed internet options and building security
- 8. Proximity to a hospital/university/convention center
- 9. Walkability and safe pedestrian connections between uses
- 10. Quiet buffers and good sound separation between uses
Step 3: Check your reasoning with a simple “tenant economics” lens
For each match, answer these questions in one or two sentences:
- Revenue driver: Is the tenant’s revenue driven by foot traffic, logistics volume, nightly stays, or workforce productivity?
- Failure point: What location or building limitation would most likely cause the business to struggle (not enough parking, poor truck access, weak demand generator, etc.)?
- Lease pressure: Would the tenant push for more TI, more flexibility, or more control of operating costs?
Answer key (property type matches)
- A → Industrial
- B → Retail
- C → Office
- D → Hospitality
- E → Mixed-use
- F → Multifamily (5+)
Optional extension: Turn the exercise into a quick underwriting checklist
Pick one tenant (A–F) and create a 6-line checklist you would use on a site visit. Use this template:
Tenant: ________ Property type: ________
1) Access: _____________________________
2) Parking/loading: _____________________
3) Visibility/wayfinding: _______________
4) Utilities/building systems: __________
5) Neighbor compatibility: ______________
6) Operating cost risk: _________________
