Why Is Commercial Property So Expensive?

In this case, the term “expensive” is relative. What looks expensive to a novice, first-time investor may look like pocket change to one that is established in commercial real estate investing.

But, to be fair, commercial real estate is generally more expensive than single-family residential homes. This is the result of a few factors.

Commercial property takes a lot of money to build in the first place. They require a whole set of systems not found in residential homes. Things like a sprinkler system and more extensive HVAC and plumbing are going to run the cost of the building up.

Another thing to take into consideration is simply the square footage of commercial property as opposed to residential property. When looking at residential property, it seems obvious that a 3,000 square foot property would cost more than a 1,000 square foot property. When a commercial building is upwards of 10,000 square feet, it makes sense that it is more expensive.

As with any real estate, cost also depends on the area and supply and demand. Commercial buildings that are run-down, out of the way, or in a bad area are going to cost less than those that are ready to use in a well-trafficked, safe area.

A final thing to consider is the current market in the area. If commercial real estate is in high demand and there are a lot of investors ready to put their money on the table, the costs are going to rise. If the demand is low, whether in general or in a particular area, you’re more likely to find a deal.

Mathew Laborde, CCIM
1 Comment
  • Jen
    Posted at 07:50h, 11 September Reply

    Because unlike residential property the property size and the number of tenants a commercial property can potentially hold, the annual return is much higher than other investments, such as stock dividends, which, on average, yield between a 2% to 3% annual return. The range is much higher for CRE, between 5% and 15%. Multi-family properties or apartment buildings tend to be toward the lower end, with suburban office spaces at the higher end.

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