17 Key Differences Between Commercial & Residential Properties

Residential real estate refers to property used to house individuals and families. This includes single-family homes, townhouses, apartments and other structures that are intended for people to live in. Residential real estate purchased or leased by individuals and families is a significant investment for most people. The value of residential real estate is determined by factors such as location, size, and amenities and can fluctuate based on market conditions. Residential real estate is an important aspect of the economy, providing homes for people and opportunities for investment. In 2021, the U.S. residential market was valued at $43 trillion, according to real estate marketplace Zillow.

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Common types of residential properties include:

  • Single-family homes
  • Townhomes
  • Condominiums
  • Cooperatives (co-ops)
  • Duplexes
  • Triplexes
  • Fourplexes
  • Mobile homes

Commercial real estate, on the other hand, refers to property used for business purposes, such as retail spaces, office buildings, warehouses and industrial sites. These properties can be used for a variety of business operations, including manufacturing, distribution and storage, and can be owned or leased by businesses or investors. The value of commercial real estate is determined by factors such as location, zoned usage, accessibility, the condition of the property and the strength of the local economy. Commercial real estate can generate income through  leases or sales, and can also be a good long-term investment for individuals and companies.

Common types of commercial properties include:

  • Office
  • Retail
  • Multi-family (more than four units)
  • Industrial
  • Warehouse
  • Hospitality

Investors intuitively understand that there are significant differences between residential property ownership and owning commercial property. For instance, residential real estate is private property intended to serve the round-the-clock needs of individuals, needs such as shelter and basic living space. Meanwhile, commercial real estate has its purpose right in its name: commerce. These locations facilitate trade and usually house businesses rather than people looking to lay their heads down after a long day. (Multi-family housing serves as an exception to that rule, but even it functions far differently than single-family homes.)

Given that these two types of properties are so fundamentally dissimilar, you’d expect for commercial property management characteristics and residential property management characteristics to vary significantly — and they do, sometimes in surprising ways. Below we detail 17 key differences between commercial and residential properties.

#1: Tenant Expenses

When dealing with a residence, tenants typically have relatively few responsibilities other than rent. Some leases don’t even require residential tenants to pay any utility costs, although most require them to cover some or all of their water, electricity, and gas bills.

Commercial tenant expense responsibilities are far more comprehensive. They may include property taxes, insurance, and maintenance, which are known as the three nets. Triple-net (NNN) leases place all three of these expenses on the tenant, while gross leases require the owner to pay for them. A modified-net lease typically splits the maintenance between the owner and the tenant while still requiring the tenant to cover insurance and property taxes.

#2: Management Needs

When horror stories about residential property management crop up, they generally involve a property manager having to fix something in a habitation during the dead of night. Yes, residential properties can require 24/7 maintenance, but they have one significant difference from commercial properties: They do not need to have a manager physically on site at all times.

Larger commercial sites such as office buildings often must have a manager available to address various property-related tasks such as repairs or emergencies. Some states have even codified this in law. However, while commercial managers typically need to be available after work hours, they do not usually have to remain on the property once tenants have closed up.

#3: Typical Lease Characteristics

One reason why so many owners of residential real estate property also manage it themselves is that residential leases are relatively simple legal instruments. Common terms, typical lengths, renewal periods — all of these remain easy to understand and implement.

Not so in commercial contexts. Commercial leases are far more complex and contain a greater number of variables such as longer leasing times, built-in variable rent increases, and an assortment of termination clauses. Ensuring a successful commercial lease requires additional attention to these many details.

#4. Applicable Legislation

Because of residency concerns, single-family homes and small multi-family properties end up subject to a patchwork of consumer-protection laws that vary from state to state, as well as federal laws such as anti-discrimination statutes. Failure to heed these laws can land a manager and/or an owner in significant legal trouble.

In contrast, commercial properties have fewer legal restrictions. Lessors and lessees enjoy greater freedom in their leasing arrangements — and it becomes that much more incumbent upon you to have a savvy real estate professional involved. Make no mistake: There’s no such thing as a “standard” commercial lease.

#5: End-User Needs

Although this point may seem obvious and immaterial, it highlights great commercial and property management differences. End users for residential properties want a home, a shelter, a place that they can retire to at the end of the day. End users for commercial properties want a profit center, something that supports their underlying business, an endeavor that benefits both themselves and associated stakeholders.

In most cases, the decisions a manager ends up making regarding tenants will relate back to these needs. Residential tenants primarily want to enjoy the residence and will seek aid regarding anything that interferes with that. Commercial tenants? They want managerial assistance with anything that is keeping their business from blooming.

#6: Pride of Use

Fortunately for property owners and managers, commercial tenants’ needs naturally align with maintenance and care for a building. The desire for profit prompts a certain kind of pride of use. Neglecting or damaging the premises doesn’t exactly spring to dissatisfied tenants’ minds when they need a property’s attractive facade and intact interior to draw customers. It’s in their best interests to work with managers rather than become spiteful.

Residential tenants don’t have the same incentives. Their frustration boils over much more easily into damage to and destruction of the place that’s supposed to serve as their home.

#7: Evictions

Depending on the state, residential evictions can turn into a Sisyphean task with each required step agonizingly drawn out and sometimes subverted by disingenuously savvy tenants bent on gaming the system. Commercial tenants have fewer legal protections available to them, and good commercial leases contain crystal clear default clauses. In the unfortunate case that an eviction becomes necessary, managers typically find commercial evictions much easier to execute.

#8: Hours of Operation

While residential tenants may not remain at the property every moment — choosing instead to leave for work, go shopping, or enjoy some off-site entertainment — they have use of it all day, every day. That translates into the need for greater managerial vigilance. Who knows when a manager might receive an emergency phone call requesting immediate service?

Commercial property managers still receive their share of midnight security alarms and 2 a.m. plumbing catastrophes, but they occur far less frequently. Additionally, even when alerts crop up, commercial properties are usually connected to some sort of monitoring service, meaning that a third party helps handle emergencies that occur during the wee hours.

#9: Price Valuations

Residential properties get valued based on comparable sales, but every real estate veteran knows that such valuations can carry a large subjective component. School districts, granite countertops, and a certain je ne sais quoi can tilt prices this way or that.

Such things really don’t happen with commercial real estate. Buyers and sellers have access to income statements and know prevailing cap rates. It’s fairly simple for everyone to extrapolate pricing from there on out.

#10: Risks

No profit-making venture comes without risks, and no type of real estate is exempt from that. For instance, residential real estate faces natural disasters, income loss and damages from tenants. Commercial properties must deal with all of these, and they stand a much greater chance of having them happen. Residential managers don’t often have to manage graffiti on facades, people getting hit by cars in parking lots, or the threat of slip-and-fall lawsuits.

#11: Formalities in Purchasing

When purchasing residential real estate, the process typically begins with a buyer finding a property they are interested in and making an offer to the seller. Once the offer is accepted, the buyer will typically conduct a home inspection and appraisal to ensure that the property is in good condition and that the price is fair. The next step is typically the closing, when the buyer and seller finalize the transaction and transfer ownership of the property. This process can be more personal and less formal.

Purchasing commercial real estate can be more complex, beginning with a business or investor identifying a property that meets their needs and conducting due diligence to ensure that the property is a good investment. This can include researching the local market, analyzing financial projections, and reviewing the property’s condition. Once the decision is made to purchase, the buyer will typically enter into negotiations with the seller to determine the price, terms and other details. The closing process of commercial real estate is also more complicated, with more legal and financial paperwork and more parties involved. The process can take longer, and the buyer may need to secure financing from a lender or investors.

#12: Risk profile

When purchasing residential real estate, the risk profile is generally lower. Residential properties are typically less expensive, have a more stable demand and are less likely to be affected by economic downturns. Residential properties are also more likely to be occupied long-term, providing a stable income stream for the owner. Additionally, residential properties are generally easier to finance and can be more affordable for individual buyers.

However, when purchasing commercial real estate, the risk profile is generally considered to be higher. Commercial properties are typically more expensive and are at risk to economic downturns. Additionally, commercial properties can be more difficult to finance, and may require a larger down payment or a more extensive credit history. They also can have a higher vacancy rate—makng the income stream more volatile.

#13: Loans

When purchasing residential real estate, the most common loan is a traditional mortgage loan. These are usually offered by banks and other lending institutions and are based on the borrower’s creditworthiness, income and the value of the property. On the other hand, when purchasing commercial real estate, the types of loans available are more varied and can include traditional commercial mortgages, bridge loans, construction loans, equity loans and SBA (Small Business Administration) loans.

#14: Location

When purchasing residential real estate, the location of the property is important in determining the value and desirability of the property. Properties in desirable neighborhoods and locations tend to be more valuable and are more likely to appreciate over time. Factors such as proximity to good schools, parks, public transportation and amenities such as shops and restaurants can make a property more desirable. In the case of commercial real estate, location is also a crucial factor in determining value and desirability.

The intended use of a commercial property determines a desirable location. For example, retail space is more valuable in an area with high visibility and easy access. In contrast, a warehouse may benefit from being outside a metro area with easy access to an interstate highway. Additionally, a property that is located in an area with a strong local economy and a large population will be more likely to attract tenants and generate income.

#15: Law (Codes and permitting)

When buying a residential property, the codes and permits required are typically less extensive than for commercial properties. Residential properties are usually subject to local building codes and zoning regulations, designed to ensure that the property is safe and habitable. On the other hand, when buying commercial real estate, those properties are subject to a much wider range of regulations and codes, including zoning laws, building codes, fire codes and health codes. These regulations are designed to ensure that the property is safe and suitable for its intended use and may vary depending on the type of business operating on the property.

#16: Building materials

Residential properties are typically constructed using materials designed for durability, energy efficiency, and aesthetics. Common building materials for residential properties include wood, brick, stucco and vinyl siding. These materials are lightweight, easy to work with and can be finished to create a wide range of aesthetic looks. Whereas commercial properties are typically constructed using more durable and heavy-duty materials designed to withstand the rigors of heavy use and foot traffic. Common building materials for commercial properties include concrete, steel and glass. These materials are strong, durable and able to withstand heavy use.

#17: Contracts

When purchasing a residential property, the most common contract used is a standard purchase agreement, also known as a residential purchase contract. This contract outlines the terms of the sale, including the purchase price, financing terms, closing date and other important details.

When purchasing commercial property, a commercial purchase agreement is typically used. These tend to be more complex than residential purchase agreements and may include more detailed information on the property, including zoning, environmental conditions and lease agreements. These agreements also tend to be more heavily negotiated, as the parties will often have different interests, and the terms of the agreement may significantly impact the value of the property.

All of the above is a great reason why having good commercial property management company matters so much — and GNP Realty Partners would like to help. Our senior staff have more than 250 years of collective experience in Chicago and the surrounding area, and we’re an Accredited Management Organization® (AMO®). To learn more about how we can help with your commercial property, contact us at (312) 329-8466 or request a proposal.