For most households, that wealth is tied to residential properties: the condo you bought, the single-family home you’re paying off. But more and more investors are looking beyond the residential market to commercial real estate (CRE) — properties used for business.[1]
That could be the office where you work, the grocery store down the street, the warehouse shipping your Amazon order, or the apartment building your landlord operates. These properties have the potential to generate income and grow in value, while giving investors a chance to diversify their overall portfolio beyond stocks, bonds, and their own home.
CRE investing grew steadily for years before taking off during the pandemic. In 2021, a record $1.3 trillion poured into CRE, up 55% from the year before. Interest rates were low, and households had extra savings. The money followed.[2]
For a while, the CRE market boomed. Sales hit record highs, nearly doubling year over year.[3] But when interest rates and inflation climbed at their fastest pace in decades, momentum stalled.[4] The NCREIF Property Index (NPI), which tracks institutional commercial real estate, logged several quarters of flat or negative growth.[5]
Now, many see fresh reasons for optimism in the category. Borrowing costs have come down from their post-pandemic highs, and while the outlook for future rate cuts remains uncertain, many private equity firms are raising new capital for real estate funds.[6]
Investors, new and old, may be rethinking how CRE fits into their portfolios. Many are weighing questions like: Are funds or individual properties the better bet? How do the risks and rewards stack up across different asset types?
While each individual investor needs to weigh these questions themselves based on their specific needs, Crowd Street has worked to help provide information to aid investors since 2014. The platform gives accredited investors self-directed access to CRE deals and funds, and has facilitated over $4.5 billion in capital across tens of thousands of investors.
As the market transitions, this guide lays out what investors need to know: How CRE works, some of the ways asset types differ, and some risks and opportunities to watch.
Commercial real estate refers to property used for business activities.
This includes offices, retail spaces, and industrial facilities like warehouses and factories. It also covers multifamily properties with five or more units.
The business of commercial real estate involves the construction, marketing, management, and leasing of these properties. Projects can take many forms — from developing a hotel from the ground up to operating a portfolio of retail centers and collecting rental income.[7]
Some commercial real estate investments focus on asset appreciation: acquiring or developing a property, improving it through construction, renovation, or repositioning, and selling it at a higher value.
Others focus on income generation: holding and operating stabilized properties that produce steady cash flow* through tenant leases.[8]
It’s a broad and diverse category with many strategies. But before diving deeper, it’s important to understand the assets involved.
Commercial real estate is typically grouped into four main property types: Office, Retail, Industrial, and Multifamily.[9]
There are also niche categories: hotels, senior housing, self-storage, mobile home parks, data centers, student housing, and more. These may fall inside or outside the four main categories, depending on how one defines them.[10]
For more information on property types, check out Crowd Street’s Definitive Guide to Commercial Real Estate Property Types. Here, we’ll stick to the basics.
Office: Office is a diverse category, with buildings of a variety of shapes and sizes. They are typically classified by their height, location, and use.[11]
Height:
Location:
Use:
Retail: Retail properties range from single-tenant buildings, like a standalone boutique, to massive regional malls. Multi-tenant retail centers are typically categorized by size and tenant mix, with five common types.[12]
Industrial: Industrial buildings are used for activities like manufacturing, research and development, and the storage and distribution of goods. They generally fall into three main categories: manufacturing, warehouse, and flex/R&D.[13]
Multifamily: Residential buildings that house multiple separate living units within a single structure or complex. These are diverse assets, typically grouped into five standard subtypes.[14]
In addition to use and tenant type, most properties are also graded by quality—typically as Class A, B, or C. CRE investors often use these terms to quickly signal a property's overall condition and appeal.[15]
Like any investment, commercial real estate comes with its own set of opportunities and risks. Advocates for the category often point to three advantages: (1) Diversification, (2) Return Potential, and (3) Passive Investing.[16][17]
While the risks of commercial real estate vary by investment, project, and partners, they generally fall into a few broad categories:[21]
Most commercial real estate investments fall into one of two categories: diversified funds and individual properties.[25]
Commercial Real Estate Fund: These investment vehicles are managed by real estate professionals who raise capital from investors (Limited Partners or LPs) to deploy across multiple deals. On a platform like Crowd Street, funds may be managed by third-party financial sponsors or by Crowd Street Advisors’ in-house team.
Funds are typically built around a specific strategy, property type, or region. While they offer access to a diversified commercial real estate portfolio, sponsors have discretion over which individual assets receive investment. That may mean investors have limited control over how their capital is allocated.[26]
Individual Properties: An individual real estate deal allows investors to deploy capital into a single property or project. A General Partner typically leads the deal — sourcing, financing, and managing the asset — while Limited Partners contribute capital.
This approach gives investors the flexibility to build a custom portfolio aligned with their specific goals and preferences. But it’s also a concentrated investment, without the built-in diversification that a fund provides.[27]
In addition to property type, commercial real estate investments are often categorized by their typical strategy. These classifications help investors better understand the investment.. Although the categories and exact definitions can vary, below are the ones used on Crowd Street’s platform:[28]
These categories are shorthand generalizations and don’t reflect the specific risk profile of any individual deal or fund.*** Each investment should be evaluated on its own merits.
For a deeper look at CRE return metrics and what they mean, check out our full CRE guide.
As discussed, individual investors typically seek returns from commercial real estate in two ways: income generation and asset appreciation. Income distributions may be paid monthly, quarterly, or annually — assuming the property is cash-flowing. However, it's important to remember, distributions are returns are never guaranteed.
Appreciation, on the other hand, is typically realized at the end of the deal when the property is sold. It may also be partially realized during the hold period through a refinance or other capital event.[29]
There are four key metrics commonly used to assess returns on CRE investments, and it’s important for investors to understand each:
For example, say you invest $10,000 in a real estate deal with a three-year hold. You receive $1,000 at the end of year one, another $1,000 at the end of year two, and $11,000 when the property is sold in year three. In total, you receive $13,000 — including your original capital — which results in a realized IRR of 10%.
Now consider another deal with the same $10,000 investment and three-year hold, but no annual distributions. Instead, you receive the full $13,000 at the end of year three.[30]
Despite the same total return, the IRR drops to 9.1% because all the cash flow comes later. That’s the time value of money in action: earlier cash flows are worth more than later ones.
It’s important to remember that IRR doesn’t account for risk, leverage, or capital structure. It’s just one measure of performance, not a full picture of an investment’s quality.
Learn more about IRR, including how it's calculated .
An equity multiple of 2.5x, for example, means an investor receives $2.50 for every $1 invested, including the return of capital.
Learn more about equity multiples.
Most sponsors target a hold period of 3 to 5 years, though some stretch as long as 10 and more.[31]
Learn more about holding periods.
For example, if you invest $100,000 in a deal and receive $8,000 in annual distributions, your cash-on-cash return is 8%.
It’s a helpful metric for understanding near-term income potential, but it doesn’t account for appreciation or one-time events like a refinance or sale.
Learn more about cash-on-cash return.
Individual deals have different plans for how potential earnings are distributed to investors, and understanding that structure is key to aligning your investments with your goals.
Distributions are based on Net Operating Income (NOI), which is simply a property’s total revenue minus its operating expenses. For an apartment complex, revenue might come from rent, laundry, and pet fees, while operating expenses could include maintenance, insurance, property management, legal fees, utilities, and taxes. Ideally, revenue exceeds expenses, resulting in positive NOI.[33]
From there, if you subtract debt service, capital expenditures, and operating reserves from NOI, you get Net Cash Flow — the actual dollars available to be distributed to capital providers. These distributions follow a capital stack structure, which determines who gets paid first. Debt holders are paid before equity holders, with capital flowing from the bottom up in what's known as the hierarchy of distributions.[34]
Your place in the capital stack affects your likelihood of receiving distributions, whether from ongoing cash flow or at the time of sale. It’s also worth noting that distributions to common equity holders are generally made at the sponsor’s discretion and are never guaranteed, unlike declared dividends from public companies, which must be paid once announced.[35]
Learn more about the real estate capital stack.
Historically, commercial real estate funds raised capital from institutional investors and family offices. But after the JOBS Act of 2012, CRE syndication expanded through platforms that connected real estate firms directly with individual investors.[36] As a result, access to the asset class has grown dramatically.[37]
Crowd Street has been that platform for more than 300,000 members, facilitating over $4.5 billion in individual capital contributions since its founding.
Individual investors accessing CRE through digital platforms typically follow a standard process:
While it's also possible to invest directly with real estate firms or financial sponsor groups, the minimums are generally significantly higher — often starting at $250,000 or even $1 million. Crowd Street sets a lower entry point, with minimums starting at $25,000.
For individual investors, CRE offers a compelling way to access assets that diversify an overall portfolio beyond the swings of public markets. But the category also carries meaningful risks that must be carefully considered. Understanding how each deal is structured, and aligning investments with your risk tolerance, is essential before getting started.
For additional insights, explore our Investor Resource Center.
* ’Cash-flow’ or ‘Cash-flowing’ when used by Crowd Street in this context refers to investments in which current revenues cover all expenses and typically provide leftover money at the end of the month. This does not mean, however, that this will provide a distribution directly to investors or that the investment will continue to perform in this manner. Distributions are never guaranteed and investing in commercial real estate entails substantive risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. ** Private real estate is, by nature, generally less volatile than the stock market. This lack of volatility does not necessarily translate to private real estate not fluctuating in or losing value. Further, the value of private real estate investments will fluctuate, and the value of real estate often lags behind general market conditions.*** Investment opportunities on the Crowd Street Marketplace are speculative and involve substantial risk. Investors should not invest unless they can sustain the risk of loss of capital, including the risk of total loss of capital. **** All examples are hypothetical and for illustrative purposes only.