Every commercial property holds value, but what determines how valuable that property is? Commercial property valuation can be very difficult to accurately determine and requires a deep understanding of all that affects, has affected, or will affect the value of real estate.
What is Commercial Property Valuation?
Commercial property valuation is the judgment of how much value is held in buildings or land that are to be used for business or leased by investors to tenants. For Commercial Real Estate (CRE) appraisers, this judgment should be unbiased and be critically evaluated, so a great amount of effort must go into ensuring its accuracy.
How is Commercial Property Valuation Determined?
Values for commercial properties are affected by many factors that can be difficult to evaluate. There are three main methods that appraisers use to calculate the value of commercial real estate:
1. Sales Comparison Approach (or “Market Approach”)
This method uses recent sales data from similar properties located in the same market area (also known as “comparables”). This approach is typically the primary method for residential property valuation, but less so for commercial properties, which are usually acquired by investors for their income potential.
2. Cost Approach
This method assumes that buyers would only pay as much for a building as they would to buy a similar empty lot in the area and construct a building with the same utility, plus profit for taking the risk to develop it. Appraisers must take into account current cost of the land, construction, and various building components, as well as depreciation.
3. Income (Capitalization) Approach
This method predicts the amount of income that a commercial property will generate in the future. Appraisers need to estimate the annual potential gross income, collection and vacancy losses, annual operating expenses and net operating income, and the rate of return or capitalization rate when determining the property’s value.
Determining which of these or other methods to use, such as the Gross Rent Multiplier (GRM), depends on the type of property being appraised, the availability and accuracy of information, and the overall purpose of the commercial property valuation.
The key question an appraisal follows is: how would a typical buyer pursue their due diligence?
One or more methods are often applied and reconciling the results into a final value conclusion typically requires a professional real estate appraiser with many years of experience.
Partner with Willowbrook Valuation & Advisory Services for Your Commercial Property Valuation
At Willowbrook Valuation & Advisory Services, we are a leader in trusted insight, cutting-edge innovation and customer service. We offer exceptional CRE appraisal services and remain dedicated to offering every client the individual valuation service they expect with the capabilities and expertise of a larger firm. To learn more about our valuation and advisory services, please contact us at (202) 919-3888.