By seeking recently sold buildings with similar properties from the same market area, a buyer hopes to ascertain a fair market value for the property in question. For example, a unit apartment building might be compared to another that sold in the same neighborhood just a few months earlier. While this valuation method is typically used to value residential real estate, it does have one significant drawback. Depending on general and localized market conditions, it can be difficult to find recent comparables for similar properties.
This valuation method is based primarily on the amount of income an investor can expect to derive from a particular property. That projected income could be derived in part from a comparison of other similar local properties, as well as from an expected decrease in maintenance costs.
All expected future income is discounted to reflect present value. This commercial real estate valuation formula is generally used to identify properties with a low price relative to their market-based potential income. This commercial real estate valuation method is used primarily for apartment buildings rather than single-unit structures. Rentable square footage combines the usable square footage the space tenants can occupy with the common areas tenants benefit from, such as stairwells and elevators.
In the end, every buyer values property differently. The valuation of commercial property does have a subjective and unscientific component. The best commercial real estate investors have honed their gut instincts around finding the most attractive deals and the most effective valuation methods for each particular type of transaction.
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CRE valuation is a whole different ball game, however, and is a much more complicated beast. Knowing the value of commercial property is important for several reasons and for several parties. At the most basic level, the value tells you the most probable price the asset would sell for present-day on the open market. The value is also important when it comes to underwriting.
On the front end, knowing the value helps determine how much you might be willing to pay for a property. The value of commercial property — both current and potential value — helps owners and investors make strategic decisions about how to position the asset relative to the rest of their portfolio. There are multiple ways to value commercial property.
Each has its own nuances, with some approaches requiring more specificity than others. This method relies on looking at comps and recent sales data to help assign a value to the property in question. Traditionally, the challenge with using the sales comparison approach in commercial real estate was that finding comps could be difficult. Demographics, leasing trends, access to infrastructure and more may look very different outside of the market area and all can have an impact on the value of the property.
To find comps using Reonomy, begin by running a property search for your target asset. See how to run a property search here. Reonomy real estate comps are based on many data points, only including factors that would equate to a very valuable comparison. Another approach is the cost approach. In short, this method assumes the value of the commercial property is equal to the cost incurred to re-construct it.
Accumulated depreciation can be calculated using the straight-line method, which in commercial real estate, depreciates an asset equally over a year period per IRS guidelines. An alternative way to calculate accumulated depreciation is by doing a cost-segregation study, which looks at the lifespan of individual building components, allowing depreciation to be front-loaded instead of equally over time.
The income approach is the most frequently used appraisal technique when it comes to valuing a commercial real estate asset. The approach is based on how much income a property is expected to generate in the future. NOI is the net income generated by a property, less operating expenses but before capital expenditures, debt service and taxes.
In other words:. To value commercial real estate in this way assumes the owner, or appraiser, has access to or can create a pro forma that shows the anticipated stabilized NOI.
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Actual case studies of office buildings, hotels, high street retails, and residential developments allow readers to understand and apply appropriate valuation methodologies. Commercial property is a major investment class that offers abundant opportunities but poses unique risks. Thorough and inclusive knowledge is essential to success in this complex and competitive sector of real estate.
This book provides expert coverage of critical topics allowing readers to:. Commercial Property Valuation is an essential resource for investors, appraisers, consultants, accountants, and students in real estate courses. He is also on the advisory board of several real estate funds and a board member of various real estate companies.
His specialization is in real estate valuations. Permissions Request permission to reuse content from this site. Undetected location. NO YES. Home Subjects Accounting Valuation. Selected type: E-Book. Added to Your Shopping Cart. The best commercial real estate investors have honed their gut instincts around finding the most attractive deals and the most effective valuation methods for each particular type of transaction. Our Relationship Managers are ready to tailor financial solutions to suit your individual needs.
Income capitalization approach This valuation method is based primarily on the amount of income an investor can expect to derive from a particular property. Value per door This commercial real estate valuation method is used primarily for apartment buildings rather than single-unit structures. Cost per rentable square foot Rentable square footage combines the usable square footage the space tenants can occupy with the common areas tenants benefit from, such as stairwells and elevators.
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