How Are Investors Evaluating Commercial Deals Today?
Lender · Albermarle, NC · Member since 2025 · 237 posts · 90 votes
When underwriting commercial deals:
What carries the most weight right now?
• Tenant quality
• Lease length
• Market stability
• Cash flow
Would love to hear different perspectives.
On the retail and NNN side where I spend most of my time, lease length and tenant quality are pretty inseparable right now — you can't really underwrite one without stress-testing the other. A 10-year lease with a regional operator that's showing declining same-store sales is worth a lot less than a 5-year lease with a national credit tenant that actually needs your location.
The other metric I weight heavily on smaller commercial deals is the lease structure quality — specifically whether the operating expenses are truly passed through or whether there are carve-outs and caps that quietly turn a NNN deal into a gross lease over time. I've reviewed a lot of deals where the seller is calling it NNN but the roof, structure, and HVAC were carved out, the CAM was capped at 2009 base-year levels, and management fees weren't recoverable. The actual landlord expense burden on those "NNN" deals can look closer to a modified gross.
Market stability matters but I think it gets over-indexed. A stable market with a weak tenant in a bad location will underperform a slightly softer market with a strong tenant who actually drives traffic. Site-level fundamentals — visibility, access, co-tenancy, density trends — matter more than MSA-level stats for most small to mid-size retail.
will have to specify the deal size and asset class.
Industrial is looking at rental rate vs market.
On the retail and NNN side where I spend most of my time, lease length and tenant quality are pretty inseparable right now — you can't really underwrite one without stress-testing the other. A 10-year lease with a regional operator that's showing declining same-store sales is worth a lot less than a 5-year lease with a national credit tenant that actually needs your location.
The other metric I weight heavily on smaller commercial deals is the lease structure quality — specifically whether the operating expenses are truly passed through or whether there are carve-outs and caps that quietly turn a NNN deal into a gross lease over time. I've reviewed a lot of deals where the seller is calling it NNN but the roof, structure, and HVAC were carved out, the CAM was capped at 2009 base-year levels, and management fees weren't recoverable. The actual landlord expense burden on those "NNN" deals can look closer to a modified gross.
Market stability matters but I think it gets over-indexed. A stable market with a weak tenant in a bad location will underperform a slightly softer market with a strong tenant who actually drives traffic. Site-level fundamentals — visibility, access, co-tenancy, density trends — matter more than MSA-level stats for most small to mid-size retail.
All of the above. There is no real seperating any of those. Cash flow is only as good as the property staying full. The property staying full is only as good as market, tenant quality and lease length. Market will dictate the type of tenants you get, the rents they will pay and the length of lease you can realistically expect.
And while my focus is on retail assets, this idea is not unique to retail. You didn't hit on location, on your list, which again, factors in very importantly, as well, because location will ultimately impact everything else, but there is no one size fits all.
Ryan's point on lease structure quality is the one that bites people most on smaller commercial deals — the NNN label gets applied loosely and buyers don't find the carve-outs until they're already in.
The other metric I'd add that doesn't get enough attention in underwriting is: exit cap rate assumption. Most buyers stress-test the income side but underwrite the exit at today's cap rate or tighter. If you're buying a 10-year deal and cap rates expand 50-75 basis points by the time you exit, that delta alone can erase several years of cash flow gains.
On smaller commercial deals especially, the spread between your going-in cap and your projected exit cap is where the real return lives or dies. A deal that looks strong on cash-on-cash can still disappoint on exit IRR if the exit assumption was too optimistic.
What asset class are you focused on Tracy — retail, industrial, office, or mixed?
OP. Your question is too broad without context or as others have mentioned, deal size and type, to respond to. Looked at your background, no deals listed. Your prior posts, looks like you're approaching this as a Mortgage Broker or lender. With that said, you have probably analyzed 100's of deal analysis. Look at the post I just did on loan rate change to see more in depth my views. But for this post, I will turn the discussion to a Lenders standpoint from me as a prospective investor.
First of all, my economic outlook for the US and the world is very negative over the next 2 to 5 years. Based on that, this dictates how I currently look at individual deals.
1. Has a to be a Strong market, property and Location first, even before the current lease, tenant, etc. If times get tough, I want the location to be strong.
2. Tenants/ facilities
Bad- warehouse 500,000 sqft with 12 foot eaves versus 16 foot. Dollar General in a town of 2,000 50 miles from Nowhere. Retail storefront of any kind, where the product can be Fedexed or UPS; and has no Service component. Mom/Pop pizza joint on a second interior street.
Good- Contractor bays of 2,000 to 5,000 sqft with 16 foot eaves and floor drains. Near, but not in high population areas. HVAC, Plumber, Electrician, Car repair etc type of renters. Medical Plaza facilities- Chiro, dentist, mental, etc. Still needed in a bad economy. Goodwill or Thrift store renter. Liquor Stores.
3. After the above, the Deal has to be a clear winner. Not a maybe if this happens or that comes thru type of deal. Market analysis has to be great, Tenant analysis, and Risk analysis.
4. Loan- Beyond the lowest interest rate. Balloon term-3/5/7/10 year on a 20/25 year amort. I want a 7 or 10 year balloon period, even if I pay 1% point more. Interest Only period up front for say 18 months or Occupancy percentage of XX% for breakeven and P/I coverage, if this is a Development or Rent up asset. Max Interest rate rider for end of Balloon. Lower Downpayment from say 25% down thru 10%. Potential to cross collateralize other assets or to put CD's or other financial assets down as collateral under the lenders discretion, plus get a 1% point lower loan rate. To get the downpayment down.
5. In the economy I view in the near future. If you/investor are in a strong cash flow and have high Investment Integrity, then loan Debt will be the "Highest" return rate of any Asset. Will pay current day dollars with Cheaper future dollars. The problem you have is if your Commercial leases are long term 5 to 10 year leases, then you can't adjust the rental rates to keep up with Inflation and the USD devaluation. As a Lender or broker, the reverse of the above is negative towards you, from a Loan exposure standpoint.
I enjoyed your response, lots of good content.
Op posts endless open ended questions on the board, probably ai or a virtual assistant trying to establish credibility is all I can guess. I about barf every time I see her subject and open ended ques.
Many posts start the same, wide unfocused question, a few bullet points and a request for feedback.
Here's some recent whoppers:
what makes a property hard to manage ?https://www.biggerpockets.com/forums/899/topics/1283352-what...
What do lenders look for in rental properties today?
What part of a flip creates the most stress?
How are you structuring debt for long term holds?
Op needs to find other people and waste their time instead of ours
Fair point Henry. Worth clarifying — I don't post my own deals because my bigger focus is deal analysis for others: realtors, investors, and consumers evaluating transactions across residential and commercial asset classes. The underwriting frameworks I share here come from that work, not just theory.
On your 2-to-5-year outlook — I hear the pessimism, but I'd push back on treating it as a reason to pull back. The old investing principle still applies: be greedy when others are fearful. Downturns are exactly when mis-priced deals surface and lazy capital steps aside. The question isn't whether to deploy — it's whether the underwriting is tight enough for the cycle. Most of your own filters (location first, contractor bays over big-box, balloon term over lowest rate) are how you pencil deals for a harder environment, not reasons to sit them out.
One thing I'd layer in: exit cap rate assumption. That's where optimism hides. A going-in cap that pencils at a flat exit often breaks if you model 50-75 bps of expansion on a 7-10 year hold. Stress-testing the exit matters as much as stress-testing the tenant.
Tracy — back to your original question: the priority I'd use is market and location first, then tenant and facility quality, then lease structure, then loan terms. Cash flow isn't a separate factor so much as the output of getting those right.
I thought I would throw this in from a lender perspective. I still keep in close contact with my commercial banking buddies from bank when I was a commercial banker. Not too long ago, I went to a CCIM luncheon where a couple of my old banking buddies were on a commercial real estate ("CRE Lending"...office buildings, multi-family, etc...where the cash flow to pay the debt service is coming from rents, not "C&I Lending", which is where the cash flow to pay the debt service comes from the occupying business's operations). The biggest thing I took away from it, and we're seeing it too, is that they are shying away even from multi-family right now...or they are at least being less aggressive. I'm in FL and taxes, insurance, and other operating costs are skyrocketing...much faster than rents are rising. The concern from commercial lenders is that even if a CRE property is cash flowing today, it might be underwater two years from now if the trend of escalating costs vs revenue continues. I thought that was quite interesting and thought I would share.
Those all matter, but they’re downstream.
What’s carrying the most weight right now is confidence in the assumptions behind those numbers.
Tenant quality, lease length, cash flow—they only hold if the inputs don’t drift.
And in this environment, drift is the risk:
So the deals that are getting through aren’t just “strong on paper”—they’re the ones where the story holds under pressure.
The real filter has become:
How fast does this deal fall apart if one assumption is wrong?
That’s why you’re seeing more focus on:
Everything you listed is still relevant—it’s just being reweighted through a lens of how resilient is this when reality doesn’t cooperate?