How To Determine Commercial Property Value?

Buying or selling a commercial property is an important decision, and a buyer should be well informed on how to determine its value.

 

Commercial properties are often expensive and demand a hefty initial financial investment. However, there are ways you can save money by researching the real estate market before purchasing a building. For that, you will need to understand what factors influence your decision and learn more about the industry.

 

By learning about commercial real estate values, you will be able to protect yourself from overpaying for a building while also ensuring that you are not underpaid if you sell your property.

 

This blog will help you determine the worth of your next commercial property purchase or sale.

 

Factors Affecting Commercial Property Value

When determining the commercial property value, you will need to consider the factors that affect this type of valuation.

 

Location

One of the most critical factors in determining the value of a commercial property is its location. The property’s location can affect many different aspects of your building, such as traffic flow, surrounding comparable buildings, and local businesses. It could either help increase or decrease the value of the property.

 

Age of Building

Another essential factor to consider is the age of your building. Older and well-maintained properties can sometimes even be more valuable than newer ones, especially if it only has minor wear and tear on them.  However,  this depends on the type of commercial real estate you own. Further, the age of your property will likely determine the classification of your building - another buying or selling factor to keep in mind.

 

Condition of Property

The condition of the property will also affect the building’s worth. For example, if renovations or repairs have been done on or to the property, it could increase its value, especially if these changes were beneficial to the overall real estate market. Things like landscaping, upgraded and updated lobby restrooms, or general security upgrades all increase the value of the property. 

 

Proximity To Services

Commercial properties can often benefit from proximity to local highways or public transportation systems. This attracts more customers who drive by during their daily commute. Moreover, nearby amenities such as convenience stores, shopping malls, and entertainment values, or lack thereof, can affect a property’s value.

 

Lease Terms and Length of Lease Term

If you are buying or selling your commercial property, another essential thing to consider is the terms of any current lease agreements. A building’s rent roll will demonstrate its current earnings. 

 

The term length can affect how much money a building is worth because if there are many months left on a or several long-term lease agreements with high rates per month, it may be hard for someone else to try and purchase the building. However, if they offer enough money, it will pressure you as an owner to sell quickly before losing out altogether.

 

Commercial Real Estate Valuation Methods

There are several ways to determine what your commercial real estate might be worth when looking at its value compared to other properties in its area. These are what we call comparables.

 

By understanding these methods better and the factors affecting the price, you will be able to make a more informed decision.

 

Cost Approach

This valuation method is generally used when you are considering to buy and or sell properties that are already built and in use. This approach uses the price of the land plus the cost of building construction minus depreciation.

 

The cost approach is less reliable than other valuation methods. However, it is the most accurate of the five different methods when the property taken into account is a new build.

 

Sales Comparison Approach

The sales comparison approach is a method that uses information from similar properties in the area to determine what your commercial real estate might be worth. Sales comparison includes looking at square footage, the number of floors/rooms, amenities, and other individual features.

 

The comparison can also include recent sale prices for nearby buildings or plots of land, giving you an idea of how much someone else might pay for the property. You can then use these factors when working out a fair price with any interested buyers.

 

Income Capitalization Approach

The income capitalization approach, commonly known as the income approach, uses the net operating income, or NOI, as a way to determine what your commercial real estate might be worth.

 

This valuation method is typical for existing buildings. It can estimate how much an owner may ask for their property based on rental rates and expenses such as repairs, insurance costs, and taxes associated with owning said building.

 

Value Per Gross Rent Multiplier

The value per gross rent multiplier method is a general approach used to determine the market value of commercial properties. This method uses a multiplier to determine the value of the building relative to its gross annual rental income. Therefore, it is essential to know the gross rent multiplier of similar properties within the area for comparison purposes.

 

Value Per Door

The commercial real estate value per door method is also prevalent since it is quick to compute. This approach will calculate the entire building’s worth based on the number of units in the building. It will then be compared to other properties for sale or currently up for lease agreements.

 

This method allows you to measure the potential price that an interested party may pay to purchase this property. You base the value on the amount it might take you as an owner to sell at current market prices while comparing your numbers against similar buildings available for sale or rent.

 

The Bottom Line

It is essential to know how to determine the commercial property value as a real estate investor. Commercial properties can be an excellent investment that will produce steady income for years to come. Still, it is essential to have all the correct information available before deciding or signing on the dotted line.

 

Understanding each of the different valuation methods will help you save time and money when purchasing or selling commercial real estate properties.