Multifamily vs Commercial Real Estate

We were posed a question the other day, "is Multifamily considered Commercial Real Estate?" The overwhelming response was... sometimes. So we did some research on when it is and when it isn't— here's what we found out! 

There are times that the multifamily industry is looped in as a sector of the overarching commercial real estate industry and other times it’s considered its own industry. Not too long ago, we thought that multifamily was 100% a part of the commercial real estate realm. But then we started seeing the two being parsed out and realized others didn’t seem to think it was a black and white answer. (Enter the response to our original question...sometimes!)

The debate about whether multifamily should be considered part of commercial real estate stems from the fact that it can also be considered residential real estate and the two are mutually exclusive (at least according to zoning ordinances).  Check out these definitions, number or units, rules around valuation, and property priorities.  We think you'll see why it's not an easy question to answer.

Terms Defined

(We know you know these, but for this debate let's refresh your memory!)

Multifamily properties are defined as buildings with more than one unit and have the ability to house several households — they're meant for people to live in yet are often used to turn a profit for the owner, regardless of whether or not the owner themselves live in the building. 

As an umbrella term, commercial real estate is any property explicitly used for business purposes — i.e if it is meant to make you money, it’s considered commercial. Commercial properties are commonly leased to tenants which generates income. Primary asset types include office, retail, industrial, and hospitality.

Residential real estate is any property meant for residential purposes, they're meant to be lived in.

(But multifamily technically  fits the bill for both, doesn't it?)

Number of Units & Property Valuation

What differentiates multifamily as residential and commercial is also present on the investment side. With fewer units, such as condos, duplexes, etc., there is a lower barrier to entry and decreased tenant turnover. On the other hand, properties with 5+ units have higher expected returns; these buildings are set to make more money simply due to the amount of available units.

In accordance with the more conservative definitions, multifamily properties are not considered commercial if they have one-to-four units such as condos and duplexes (all the way up to quadplexes) and are considered commercial buildings if they have more than five such as apartment complexes, student housing, assisted living facilities, etc. — it's all about scale and intent. Properties with more than five units are part of the commercial realm because its primary purpose is to make money.

The valuation of the building also differs for multifamily buildings depending on whether it is commercial or residential. The value of condo, duplexes, etc. is comparable to nearby properties. The value of multifamily commercial buildings is largely determined by revenue generated. 

(Seems the easiest way to answer the question, if that's all it was based on!)

Property Priorities

Typically residential properties are strictly meant for living, i.e. non-commercial home use only, private living quarters. But in the case of a multifamily building, it is used for living and commercial purposes; they are widely accepted as a separate industry due to its hybrid nature.

Some argue that multi shops should be separate because they care about different things than other CRE borrowers. They have to think about the individual tenants more carefully — including, but not limited to features that allow for livable conditions, shared amenities, and general enhancements for their tenants' experiences — after all, it is their home. Amenities and perks of a property that are important to multi borrowers might be completely irrelevant to retail shops or office buildings.

While explicit intent is important in differentiating commercial and residential, you must also consider the differences in investment factors, valuation, and definitions if you're going to form an all around opinion. 

Clear as mud, right?!  Maybe the best answer to "is Multifamily considered CRE" is actually sometimes!

What do you think? Email us at theboss@loanboss.com

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