5 Reasons Why It Seem Like Commercial Real Estate Is Less Popular

In most jurisdictions in the United States, a real estate sales license is a real estate sales license. This means that although there may be special designations and certificates that a real estate professional specializes in a certainty type of real estate sales, there is no difference in the type of a license that a commercial real estate salesperson obtains that distinguishes it from the licenses of a residential Realtor. Not only are the licenses the same, but the training is also the same. It is for this reason that most commercial real estate brokerages have extensive training programs and some require up to a year of mentoring before an agent to attempt to pursue a listing on their own. In contrast, license for a real estate attorney or a real estate appraiser are distinct and require different types of training. So, if most real estate sales licensees can sell both commercial and residential real estate, why do most choose to only sale residential real estate? Some of the reasons are presented below.

1. Residential Real Estate Is More Familiar

Unless you are a business owner, it is more likely that you are more familiar with the concept of a house sale than you are the sale of a commercial building. Despite the fact that we probably spend more time at work, in restaurants, doctor’s offices, lobbies and other commercial real estate properties than we spend in our homes, there are many more people that have the experience of owning a home than owning commercial real estate. Homeownership has also been marketed to the public as a means toward obtaining wealth and “the American Dream.” Commercial real estate, however has not benefited from similar marketing. In fact, many believe that commercial real estate sales are more complicated than residential real estate sales, despite the fact that multifamily sales have many similarities to residential sales and warehouse sales, because of their having less to inspect on the interior, may be less complex than residential sales. This brings us to our next point.

2. Commercial Real Estate Is Perceived As More Complicated

Commercial real estate sales are not the same as residential real estate, but they are not so starkly different that the process cannot be understood. The primary difference between the two transactions is that commercial real estate purchases have primarily financial motivations. As such, the property’s value and its ability to generate income are supremely important. Depending on the type of property, the ways to measure property value and income generation vary, but can be learned over time. Residential real estate transactions are also driven by property value, but are less concerned about income generation, unless the residential property is being used as an investment. Both types of transactions use comparative sales and listings to value properties, but commercial real estate has other terms, like cap rate, gross rent multiplier, price per square foot, etc.

Most of the various steps toward closing in a commercial real estate transaction have residential analogues. Properties in both instances have to be inspected, titles need to be reviewed, financing has to be sought and terms negotiated. Offers made via an offer sheet in residential real estate and via a letter of intent in commercial real estate, but the two basically serve the same function. Commercial property inspections generally include an environmental audit, which may also be necessary in residential transactions, as well, if the existence of hazardous conditions are known. Essentially, the two types of transactions have different customs, but serve the same purpose and have very similar component parts.  

3. The Residential Market Is Larger

The bottom line is that more residential properties have been built than commercial properties and they are sold far more frequently. The sheer number of transactions in the residential market dwarfs the commercial market. Since the residential market is larger and more active, it can accommodate more salespeople. The frequency of the transactions also leads real estate professionals to get a sense of accomplishment more often.

Additionally, there are more residential brokerages than commercial brokerages. This fact translates to more opportunities for a residential agent to find a brokerage than a commercial agent. The larger number of brokerages leads to more standardized residential practices and, prior to the NAR settlement, more broker cooperation. Commercial brokerages, by contrast, are more idiosyncratic and more competitive amongst one another.

4. The Barrier to Entry Into Residential Real Estate Is Lower

The typical downpayment for a commercial real estate purchase is 25% of the sales price. There are no first-time property programs and few areas of government assistance for small scale projects (really large scale projects benefit from public finance offerings, payments in lieu of taxes, zoning incentives, eminent domain takings and a whole host of other forms of government assistance, but have much higher barrier to entry than 25%) In contrast, there are many incentives to increase homeownership and mortgages that require as little as 3% down. In some areas, there are programs that offer homeownership for as little as $500 out of pocket. There are also many programs that forgive half of a home mortgage 3 years after purchase. Purchasing a home is much easier and more incentivized than purchasing a commercial property and thus residential actions take place more often and with much more facility.

Money isn’t the only barrier to entry when it comes to real estate. The knowledge necessary to understand real estate transactions has frequently been cited as a reason why many view real estate as overly complex. Both residential and commercial real estate have their own individual terms and language, used in their submarket. Commercial real estate, however, has the added challenge of understanding the businesses that one most frequently serves to address and anticipate their needs. In order to do so, there is an acclimation process that takes place in which commercial real estate salespeople must learn about the businesses they serve. This acclimation can take the form of formal training or experience gather over many interactions with business owners. However this knowledge is gained, it is a must and is not as necessary to close residential transactions. A good residential agent will also learn to understand the needs, concerns and patterns of behavior, as this will give them an edge over their competition, but in commercial real estate, this knowledge is required.

5. Residential Transactions Happen More Frequently

In conjunction with the second point,  residential sales, purchases and rentals happen more frequently than commercial transactions. Housing is an essential need of every person and these needs are present everywhere there are people. Commercial leasings, purchases and sales, on the other hand happen at specific times during a business’s life cycle and may only ever happen once. It is not uncommon for a business to spend its entire existence in one place. In contrast, the US Census Bureau has found that Americans on average move nearly 12 times in their lifetime. With more frequent transactions, the perception is that residential real estate is a more stable source of income for newer agents than is commercial real estate. Although the larger sale values, commission splits and fewer agents in the market for commercial real estate more than offset the volume of residential real estate, the perception still remains and acts as deterrent for many.

Wrapping It All Up

Overall, commercial real estate sales can be a very lucrative career that initially requires a little more of beginning real estate agents than residential. That said, the lucrative nature of commercial real estate more than out weighs the initial investment of time, commitment and effort necessary to begin. Many real estate salespeople do not attempt to learn more about commercial real estate and are content to only do that which is most familiar to them. Although this is understandable, it does serve to limit the number of people in commercial real estate sales. There are many more reasons why commercial real estate sales have a stigma to them, but above are the five most popular.