What Is Commercial Property? Definition and How It Yields Profit

Commercial property is real estate that is used for business activities. Commercial property usually refers to buildings that house businesses, but can also refer to land used to generate a profit, as well as large residential rental properties.

The designation of a property as a commercial property has implications for how it is financed, how it is taxed, and how the laws are applied to it.

Breaking Down Commercial Property

Commercial property includes malls, grocery stores, offices, industrial estates, manufacturing shops, and more. The performance of commercial property—including sales prices, new building rates, and occupancy rates—is often used as a measure of business activity in a given region or economy. For example, the RCA Commercial Property Price Indices measure the price changes in commercial real estate across the United States. 

Commercial leases can come in a variety of forms that best suit the property owner and the tenant. The lease may list reasons for when the lease can be broken and stipulations for timely renewals.

Investing in Commercial Property vs. Residential Property

Commercial property has traditionally been seen as a sound investment. Initial investment costs for the building and costs associated with customization for tenants are higher than residential real estate. However, overall returns can be higher, and some common headaches that come with residential tenants aren't present when dealing with a company and clear leases.

Commercial property investors can also utilize the triple net lease, whereby expenses such as real estate taxes, building insurance and maintenance are borne by the company leasing the premises. This advantage is not available to residential real estate investors.

In addition to favorable leasing terms, commercial property tends to benefit from more straightforward pricing. A residential property investor must to look at a number of factors, including the emotional appeal of a property to prospective tenants. In contrast, a commercial property investor can rely on the income statement that shows the value of current leases, which can then be compared against the capitalization rate of other commercial property in the area.  

Investing in Commercial Property through REITS

Real estate investment trusts (REITs) are an ideal option if you want to invest in commercial property but lack the capital or desire to buy a whole building. REITs operate like mutual funds, in that they pool investment dollars to buy assets. Each share in a REIT represents the company's underlying assets. Buying shares in a REIT that specializes in commercial property gives you exposure to this sector without requiring you to buy a building on your own.