What Is a Good Return on Investment for Commercial Property?

Evan Willoughby

Chasing great returns on commercial property isn’t about grabbing the first shiny deal. If you walk into a sale talking ROI without knowing what’s actually 'good,' you’re flying blind. ROI—return on investment—isn’t just a catchphrase for boardrooms. In commercial real estate, it tells you if you’re wasting money, breaking even, or hitting the jackpot.

If you ask ten investors what a 'good' ROI looks like, you’ll get ten different answers unless you pin them down on details. Is it downtown retail? A suburban office building? Context matters, and so do the numbers behind the glossy photos and sales pitches.

Want something practical? Smart investors look at NOI (net operating income) and compare that to the price they pay—simple math, but it tells you loads. We’re talking actual dollars in your pocket, minus stuff like taxes, management fees, and never-ending repairs.

You don’t need a finance degree to get this right. Just a clear idea of what goes in, what comes out, and how to spot a deal that’ll actually work for you—not just on paper, but when the rent checks hit your bank.

• Understanding ROI in Commercial Property
• Typical ROI Benchmarks and Numbers
• Key Factors That Impact Your Return
• Tips to Maximize ROI on Your Investment

Understanding ROI in Commercial Property

The term return on investment—or ROI—gets thrown around a lot in the commercial real estate world. But if you don’t nail down what it means for your property sale or purchase, you could be making decisions based on hype, not hard numbers. ROI measures how much cash you’re actually getting back from a property compared to what you’ve put in. It’s the clearest way to see if your commercial property is pulling its weight.

Here’s the basic formula everyone uses: take your annual net operating income (NOI), divide it by the total amount you spent to acquire the property, then multiply by 100 to get a percentage. NOI is just your rental income minus expenses like maintenance, management, insurance, and property taxes. This gives what’s usually called your capitalization rate, or cap rate. Simple, right? But it’s powerful, since it gives you a way to compare very different properties on a level playing field.

Let’s look at an example. Say you buy a small office building for $1,000,000. After all expenses, you clear $70,000 a year. Your basic ROI formula will look like this:

So, a 7% return is a straightforward way to compare this office building to a retail property or industrial warehouse. Is 7% good? That depends on your market, property type, and what else is out there. But now at least you’re comparing apples to apples.

There are a couple of ways to dig deeper, too. Some investors include loan payments, which shifts the focus to cash-on-cash return—this tells you what percentage you’re earning on just the cash you invested, not the whole value of the property. That can matter if you’re leveraging with a mortgage. Either way, stay focused: ROI shows if a commercial property does more than just look pretty in a brochure. It’s all about the real money actually hitting your account.

• Use actual, not projected, income and expenses for your math.
• Double check if property upgrades (like new HVAC or a roof) are needed soon, since big repairs crush ROI fast.
• Look at the local average cap rates to see how your deal stacks up. Cap rates in big markets like Dallas or Miami can run 5% to 8% for offices and retail, but can hit 10% or higher in risky spots or with tough tenants.

The bottom line: ROI is your reality check in the world of commercial property. Don’t skip it, and don’t get sucked in by wild promises lacking this simple math.

Typical ROI Benchmarks and Numbers

If you’re buying or selling commercial property, you want to know what a solid return on investment really looks like. Numbers make all the difference. Typical ROI targets hover between 6% and 12%—but it’s not a one-size-fits-all game. Let’s break that down with some real-world examples.

For stable assets like single-tenant retail buildings or major chain pharmacies, folks tend to accept lower returns, often around 5% to 7% a year. Think national brands with ironclad leases—a safer bet, so you won’t see sky-high yields.

If you’re sniffing around for more action and take on a little risk, strip malls, small warehouses, or older office buildings might promise 8% to 10%—sometimes even a little more, especially if the area’s trending up or the property needs work. These riskier plays demand bigger rewards because, well, trouble can come with higher upside.

Local economies matter, too. Hotter cities pump up demand and prices—which can shrink ROI but also cut risk and raise property values faster. Slower markets may offer better cash flow, but you’ll trade off stability. Right now, in 2025, the U.S. Fed’s interest rates are sticking higher than the rock-bottom rates we saw six years ago, so people expect juicier yields to balance out those loan costs.

Don’t just focus on average numbers. Smarter investors do the math on cash-on-cash returns, cap rates, and sometimes internal rate of return (IRR) for big projects. Quick rule of thumb? If the ROI is lower than what you’d get from a safe bond (like a Treasury), you’re probably not getting paid enough for the hassle or risk of owning real estate.

Key Factors That Impact Your Return

Not all commercial property is created equal, and honestly, neither are the returns. If you’re aiming for the best return on investment (ROI), you need to know what makes those numbers swing up or crash down. Here are the main things that seriously impact your profit:

• Location: Think of it as the golden rule in real estate investing. High-traffic areas or growing neighborhoods usually mean higher rents and quicker appreciation. But look out—great spots cost more upfront and aren’t immune to sudden downturns if a city’s economy takes a hit.
• Property Type: Office space, retail, and industrial buildings all play by different rules. For example, warehouses and logistics spaces saw higher demand and stronger rents, especially after 2020. Retail, on the other hand, has been way more volatile with the rise of online shopping.
• Tenants and Lease Terms: A property with national brand tenants on 10-year leases? Usually less risky and more stable income than a one-year lease to a small business with a shaky track record. Vacancy kills ROI, plain and simple.
• Condition of the Building: If the place needs tons of repairs or constant updates to meet current codes, your cash flow takes a hit. Newer or well-renovated buildings generally mean fewer headaches and more steady income.
• Market Trends: Rising rents, low property taxes, and decreasing vacancy rates all give your ROI a lift. Reserve funds for the unexpected, though—sudden changes in laws, taxes, or interest rates can eat into your bottom line fast.

To put some hard data on it, here’s a quick look at average vacancy rates and cap rates across commercial property sectors in the U.S. as published by CBRE in late 2024:

See those numbers? Industrial properties are hot right now, while office spaces have more risk thanks to high vacancies. Always check these stats for your own local market before jumping in.

And hey, taxes and loan interest can’t be ignored. Higher property taxes or an adjustable-rate mortgage can turn a solid deal into a money pit fast. Run the numbers—don’t guess, or you’ll probably regret it.

Tips to Maximize ROI on Your Investment

If you want a better return on investment from your commercial property, small tweaks and smart moves can make a big difference. Don't just hope the market saves you—stack the odds in your favor.

• Upgrade what matters: Fixes that add value don’t have to break the bank. Fresh paint, better lighting, energy-efficient upgrades—these pay back fast. For example, swapping in LED lights can drop your utility bills by up to 30% a year. Better yet, tenants love spaces that cost less to run.
• Charge market rent: Under-pricing your units is like leaving money on the table. Check what similar properties in your area cost, and don’t be afraid to adjust. Regularly reviewing your rents compared to local averages can bump your income without extra cost.
• Cut avoidable expenses: Go through your monthly bills with a fine-tooth comb. You’d be shocked how many pay for old service contracts or unnecessary extras. Things like renegotiating a cleaning contract or switching insurance providers can shave off hundreds—or more—each year.
• Keep vacancies low: Every month a unit sits empty, you’re losing money. Respond fast to tenant issues, keep the property clean, and market open spaces aggressively. Properties with an average vacancy rate below 8% in the U.S. typically earn higher ROI, according to a 2023 CBRE report.
• Pick a good property manager: Don’t try to do it all yourself unless you really know what you’re doing. The right manager finds decent tenants, handles maintenance, and keeps things running tight.

You want more specifics? Here’s a quick comparison of how some upgrades and management choices can impact your commercial property returns:

At the end of the day, squeezing more out of your commercial property investment isn’t about taking wild risks. It’s about dialing in your operations, upgrades, and rents so every dollar works harder for you.