Commercial Property Essentials and What Residential Brokers Need to Know

If you're a residential mortgage broker looking to expand into commercial real estate, getting familiar with the different property types is your first real step. You already know homes like the back of your hand, but commercial properties work very differently — with their own evaluation metrics, financing quirks, and market patterns.

I'll walk you through the main commercial property types, starting with ones that'll feel somewhat familiar to you as a residential broker, then moving into more specialized categories. This knowledge will help you hit the ground running with your first CRE deals.

The Big Shift: Think About Income, Not Just the Borrower

Before diving into specific properties, there's a mindset shift worth mentioning. In residential lending, you're mainly focused on the borrower — their income, credit score, and ability to repay. Commercial lending flips this around, putting the spotlight on the property itself — how much income it generates, whether it keeps tenants, and what kind of returns it provides.

This means you'll be looking at things like debt service coverage ratios (DSCR) and capitalization rates (or cap rates), not just LTVs and credit scores. Keep this income-first perspective in mind as we go through each property type.

Multifamily Properties: Where Most Residential Brokers Start

For residential brokers, multifamily properties generally make for the smoothest transition into commercial lending. These include apartment buildings and complexes with five or more units (properties with two to four units still count as residential in most cases, as you probably know, and this means multifamily loan types generally won't be available for them).

Why They Make Sense as a Starting Point

Multifamily properties sound like a logical place to start. They both are used for housing people, after all — but there are some serious differences, since you're focusing more on the property's rental income and how they're operated. Still, a residential mortgage broker like you will be able to leverage a lot of existing knowledge to give you an advantage.

Numbers You Need to Know

• Occupancy Rate: How many units have tenants (expressed as a percent)
• Rental Income: What comes in from all units combined.
• Operating Expenses: What it costs to run the place (usually 30% to 40% of total income, but this can vary widely)
• Net Operating Income (NOI): Rent minus expenses over a period of time (usually one year)
• Cap Rate: NOI divided by property value — basically the return percentage

How Financing Works

Multifamily financing has some key differences from residential:

• FHA-insured loans work for properties with five or more units, and can go up to 90% LTV, and agency loans (Freddie or Fannie multifamily) also offer highly competitive options
• Lenders typically want a DSCR of 1.25 or higher, meaning the property brings in 25% more income than needed for loan payments
• Construction-to-permanent loans are growing more common for new builds
• Lenders care more about the property's income than the borrower's personal income

What's Happening in the Market in 2025

Multifamily is having some challenges right now. Occupancy is a bit down, and rents are mostly in a holding pattern, according to several data providers, thanks to a recent glut of multifamily construction in a lot of markets. At the same time, increasing insurance costs are leading to higher operating expenses.

Even with these more nationwide issues, every market (and every submarket within every market) behaves differently. Plenty of good deals are out there, and pricing has started to taper, meaning many on the sidelines are considering jumping on investments.

Office Properties: A, B, and C — More Than Just Letters

Office buildings make up a big chunk of commercial real estate, ranging from small suburban buildings to downtown high-rises.

The Different Types

• Class A: The premium stuff — great locations, fancy lobbies, top-notch everything. They get the highest rents but also attract stable tenants. They're usually located downtown.
• Class B: Good but not great — decent locations, nice enough buildings. They might be older properties in good areas or newer buildings in so-so locations.
• Class C: Older buildings in less desirable spots, offering the basics without the frills. They attract tenants looking to save money and might need significant updates.

What to Look For

• Vacancy Rate: How much space is available — this impacts cash flow
• Rental Rates: Usually priced per square foot per year
• Lease Terms: Office leases run longer than residential (5 to 10 years typically)
• Tenant Quality: Who's renting matters — their credit can affect financing
• Building Efficiency: Usable space versus total space

Financing Details

Office loans typically involve:

• Higher DSCR requirements because vacancy risk is higher
• CMBS loans (commercial mortgage-backed securities) for bigger properties
• Shorter terms (5 to 10 years) with balloon payments
• A careful review of when tenant leases expire
• Bigger down payments (25% to 35% is common)

Current Trends

Everyone knows that office properties have been having a pretty rough time since the COVID-19 pandemic. While those times may be (more or less) behind us, office hasn't recovered. Many employers have begun requiring employees to return to office, but office properties are still far more underutilized than they were before 2020.

This doesn't mean office is a bad asset type to work with, but it requires a more careful understanding of how a building's tenants are utilizing space (and if they plan to continue to do so).

Retail Properties: From Strip Malls to Big Shopping Centers

Retail covers a wide range of buildings meant for consumer businesses.

The Main Types

• Shopping Centers: Larger properties with multiple stores, usually anchored by one or more big retailers
• Strip Malls: Smaller rows of stores with shared parking
• Standalone Retail: Single buildings with one retailer

What Matters Most

• Sales Per Square Foot: How productive the retail space is
• Traffic Counts: How many people or cars pass by
• Anchor Tenant Quality: The big stores that bring in customers
• Tenant Mix: Having diverse, complementary businesses
• Lease Structures: Sometimes they include base rent plus a percentage of sales

Financing Factors

Retail lenders really focus on:

• How creditworthy the tenants are, especially anchor tenants
• Lease terms and when they expire
• Location quality and how easy it is to access
• Protection against online competition
• How well the surrounding area is doing economically (looking at average family income, among other things)

What's Trending

Despite Amazon and online shopping, retail is holding up surprisingly well. Neighborhood retail centers have stable pricing, with successful properties focusing on businesses that can't be replaced online (restaurants, gyms, medical offices). Lenders have gotten pickier, favoring properties with strong anchor tenants and a good mix of businesses.

Industrial Properties: Warehouses to Factories

Industrial has become one of the strongest commercial sectors, driven by online shopping growth and supply chain changes.

The Main Types

• Warehouses: Buildings for storing goods
• Distribution Centers: Facilities for receiving, storing, and shipping products
• Manufacturing Plants: Buildings designed for making things
• Flex Space: Combination of warehouse and office space

What to Look For

• Location: How close it is to highways, ports, or rail
• Clear Height: How high the ceilings are (higher is better for modern logistics)
• Loading Capabilities: Number and type of loading docks
• Power Capacity: Especially important for manufacturing
• Floor Load Capacity: How much weight the floor can handle

There are plenty of other important characteristics beyond these; you can find a comprehensive list on one of our sister sites.

Financing Advantages

Industrial properties often get better financing terms:

• Relatively high LTV potential (usually up to 75%) for properties with solid, long-term tenants
• Competitive rates from regular banks
• SBA loans available if the owner occupies the property
• Simpler operations compared to other commercial properties

Market Update

Industrial property values are increasing moderately, despite massive development across the country, showing strong demand for logistics space. Online shopping continues to drive warehouse demand, while some return of manufacturing to the U.S. has also helped. These properties have weathered economic downturns well, making lenders more comfortable with them, even if they aren't quite as "red hot" as they were in 2020 and 2021.

Specialized Property Types: Healthcare, Hotels, and Others

Beyond the main commercial categories are several specialized property types. While these may not be the best place to start, they offer opportunities to expand your business later.

Healthcare Properties

From hospitals to medical office buildings, healthcare properties come with unique considerations:

• Regulatory Compliance: These facilities must meet specific codes
• Specialization: Properties often designed for specific medical uses
• Tenant Stability: Medical practices tend to stay put
• Financing: Specialized lenders focus on lease terms and regulatory compliance
• Recent Trends: Healthcare real estate saw big deals in 2023, with facilities averaging 87% occupancy

Hotel and Hospitality

Hotels, motels, and resorts operate on their own unique metrics:

• Occupancy Rate: Percentage of rooms filled (usually on average over a quarter or year)
• Average Daily Rate (ADR): Average revenue per occupied room
• Revenue Per Available Room (RevPAR): The key performance indicator of revenue maximization
• Financing Challenges: Higher volatility means stricter lending requirements

Special Use Properties

This catch-all category includes theaters, stadiums, churches, car washes, and other unique buildings:

• Limited Alternative Uses: Often hard to repurpose if the business fails
• Specialized Financing: SBA loans can often help mitigate lender risk in some cases, but they come with their own set of requirements
• Custom Evaluation: Each property type has its own metrics
• Higher Risk Perception: Lenders may require lower LTVs and higher interest rates

Where to Start: Getting Your First Commercial Deals Done

For residential brokers moving into commercial lending, here's a practical approach:

1. Start with Multifamily: Use your residential knowledge while learning commercial basics.
2. Branch Out to Office or Retail: These property types have relatively straightforward evaluation metrics.
3. Build Knowledge One Step at a Time: Master one property type before moving to the next. Don't take on too much too fast.
4. Use Technology to Your Advantage: Janover Pro can help you find lenders for specific property types while you build direct relationships.
5. Join Industry Groups: Organizations focused on particular property types offer great education and networking.

Each property type has its own quirks, but the basics of commercial evaluation apply across all of them. By starting with what feels familiar and expanding gradually, you can successfully add various types of commercial lending to the services you offer.