Commercial Property

Commercial property is real estate held to produce income: office, retail, industrial, hotel and, in most lending and appraisal practice, apartment buildings of five or more units. It is the field where net operating income is the standard performance measure and the basis of value.

In commercial practice a building is worth what its NOI supports at the market cap rate, not what the house next door sold for. That is the income approach, and it is why a commercial broker's offering memo leads with NOI. The same arithmetic applies to a single house: $18,270 of NOI at a 6.5% cap rate supports a value of $281,077, whatever the comparable sales say.

The Wikipedia commercial real estate article describes how lenders size loans against NOI through debt service coverage, and how leases in the sector, often net leases, shift operating costs to tenants. The practical difference from residential is discipline. A commercial appraisal will include management, reserves and vacancy every time. A residential listing often includes none of them, which is why rebuilding the NOI yourself matters more on small property, not less.

Further reading: Commercial Property on Wikipedia.