Commercial Real Estate vs Residential Real Estate

When comparing residential vs commercial property, the primary difference comes down to how it can be used.

Whether you are a current real estate investor or you’re looking to begin investing in the near future, you might wonder about the differences between commercial real estate (CRE) and residential real estate. While both have undergone significant changes since early 2020, the real estate industry in general has shown great signs of improvement.

In this article, we’re exploring common questions about residential and commercial real estate, as well as why good data, including commercial real estate data, is imperative to making strategic investment decisions.

What Is the Difference Between Residential and Commercial Real Estate?

When comparing residential vs commercial property, the primary difference comes down to how it can be used. Residential property is designed for the sole purpose of living, and it includes things like single-family homes and small buildings with four or fewer units. Commercial property, on the other hand, is designed primarily for business-related functions. Common types of commercial real estate include offices, retail shops, industrial buildings, and hotels. Large multi-family buildings and mixed use spaces typically fall into this category as well.

Discussing the different types of commercial vs residential property is fairly straightforward. However,  understanding how these types of real estate differ from each other in terms of investing is much more nuanced.

Is Commercial or Residential Real Estate Better?

The truth is, both commercial and residential real estate can present solid investment opportunities, and there are pros and cons to both. 

Investing in commercial real estate, for example, requires more up-front capital than residential real estate. However, some CRE investors are turning to crowdsourcing—or joining forces with other investors to collectively invest in commercial real estate—as a way to access these types of properties. This is just one example of new, innovative trends in the real estate industry. An advantage for investors, CRE also presents longer leases and lower vacancy rates. Not to mention that the ROI for commercial real estate can be quite high, even in instances of crowdsourcing.

Alternatively, investing in residential real estate requires less upfront investment, and the market tends to perform well in times of economic distress. But, there’s a much higher vacancy risk, and the financial gains tend to be smaller.

In the end, it comes down to preferences and the unique situation of the investor. Cash flows, risk tolerance, the level of involvement, and more should all be considered when determining which industry to invest in.

As a CRE data company, Canyon Data, delivers comprehensive, accurate, actionable information to provide investors and professionals in the CRE industry with the data necessary to make informed, strategic decisions.

What Are the Market Trends in Residential and Commercial Real Estate?

When looking at the real estate market over the course of the next year or two, trends like technology, remote work, and population shifts are all extremely important in both the residential and commercial markets.

  • The use of technology has accelerated. The COVID-19 pandemic drove change across nearly every industry, including both residential and commercial real estate. Things like tours, drone videos, staging, and financing have moved online, making it quicker and easier for sellers, real estate professionals, and investors to connect. At Canyon Data, for example, we take state-of-the-art tech like robotics and A.I. and combine it with human collaboration to provide the most exhaustive CRE dataset on the market.
  • Hybrid and remote work are here to stay. While many employers haven’t defined what their work structure will look like in 5 or 10 years, it’s clear that hybrid and remote work, in some form, will persist. This “new normal” has impacts on both the residential and commercial real estate markets. Those who work from home are looking for more space and more amenities in their homes or apartments. On the commercial side of things, investors are getting creative. The Commercial Real Estate Development Association (NAIOP) recently published a study about the increasing demand for life science, medical office, and multifamily spaces and what it might look like to convert existing office spaces.
  • Smaller cities are drawing a crowd. Since 2020, we’ve seen more and more articles talking about COVID-19 and suburbanization. In New York City at the height of the pandemic, for example, Brookings Institute reported that property values in the city decreased while those in suburban areas like Long Island, upstate New York, and New Jersey increased in value. And it’s not just suburbanization. Smaller cities are having a resurgence. At the top of PWC’s 2022 Overall Real Estate Prospects list you’ll find cities like Nashville and Raleigh/Durham while large metropolitan areas like Boston and Washington D.C. have slipped lower down the list. 

What Are the Most Lucrative Real Estate Investments?

For investors, commercial properties tend to yield higher returns than residential properties.  While there are a number of reasons why this is the case, here are the most compelling:

  • Commercial properties have longer leases. Residential leases are typically 12 months long, but it’s not uncommon for commercial properties to issue leases that run for five or more years. This provides investors with a more predictable cash flow. 
  • Commercial properties frequently use net leases. Net leases—which can be structured as net, double net, or triple net—pass off some of the costs associated with taxes, insurance fees, and/or maintenance costs to lessees. This reduces the ongoing financial responsibility as well as the financial risks associated with a property.
  • Commercial properties are easier to increase in value. In residential units, property values are largely based on geography and the price per square foot of sales comps—factors unlikely to change quickly. Commercial properties, however, are predominately valued on the net operating income. Small improvements and the addition of a new lucrative tenant could increase the value much more quickly.

Is Now a Good Time to Invest in Commercial Property?

Yes, now is an excellent time to invest in commercial real estate!

While the CRE industry as a whole saw declines in 2020 due to the COVID-19 pandemic, numbers are trending upwards for 2022 and beyond. This is especially true for multi-family and industrial-use spaces, which have seen valuation numbers soar past 2019, pre-COVID levels. 

For example, Statista reports that the value of multi-family commercial real estate investments in the US in 2019 was approximately $191.6 billion. By the end of 2021, that number had reached $315.4 billion. Looking at industrial CRE investments, the 2019 valuation was $117.5 billion, and by 2021 it had reached $160.2 billion.
All of this—of course—hinges on having good, accurate data that allows investors to make informed and strategic decisions. At Canyon Data, that’s our mission. Our data subscription provides you access to 150 data points. We verify our data every 30 days to ensure you’re getting the most accurate data on the market. Learn more about the most exhaustive CRE dataset on the market. Ready to get started? Subscribe today.

What is the Best Site for Commercial Real Estate? Canyon Data Meets Advanced Needs with Advanced Technology

Here at Canyon Data, our mission is to fill the gaps and solve the incomplete data problem in the CRE industry. Our data-driven insights will give you the information you need to determine the significance of a potential CRE investment. A subscription with Canyon Data provides the data to conduct an in-depth analysis of the benefits and risks involved with a particular property. Gain unprecedented insights with a Canyon Data subscription today. Get a Subscription