No matter the state of the market, it’s important to understand the value of the commercial real estate you’re sitting on, regardless of whether you’re ready to sell just yet. Here are a few methods we use to value commercial real estate for our seller representation listings.
Look at Comparative Properties
As brokers, we have access to on and off market properties across the globe. Our databases help us to find properties in similar size, location, and age to your own. We’re able to examine the market vacancy, recent sales and a ton of other demographic data. These resources help us provide you with an accurate, attractive price.
If you don’t have a broker, you can still find comparative properties. It’ll just take more time and will likely be less accurate. You can sift through public records or take a drive through your neighborhood to hunt for recent commercial sales.
This method of property valuation is known as the sales comparison approach. It’s typically used in residential real estate but can also be used for commercial transactions.
Look at Cost
The cost approach calculates the total cost to rebuild the property from the ground up. This method takes into account, the cost of the land, construction and any labor associated with building the current structure.
You can use this formula to calculate your value: property value = land value + cost to build new + accumulated depreciated.
If you’re a long-term property owner, this may be the easiest method to use since you likely know the price you paid to build the structure. This method may cause more headache than it’s worth if you’re unsure of material and/or land costs or if you don’t know how to calculate the depreciation.
Look at Income
If you’re working with a broker, there’s a good chance they’re using the income approach to value your property as it’s the most widely used method. This approach looks at the structure in relation to the income it is expected to generate.
Start by looking at your net operating income (NOI) and capitalization rate (cap rate.) NOI is calculated by taking the effective gross income less the operating expenses. NOI does not include tax or your mortgage payment.
Once you have your NOI, you can calculate your cap rate. Cap rate is a ratio of NOI to the property’s value. It’s calculated by taking the NOI and dividing it by the value. Cap rates vary by market depending so don’t fret if you see much lower cap rates in New York, for example.
Now, this is where things get tricky. If your NOI is even slightly off, your cap rate will be skewed. This could ward off potential investors that are looking for a specific rate. A seasoned commercial real estate broker, can help you position your property at the ideal cap rate to attract investors.
Other Questions to Consider
Of course, there are things that make your property and potential sale unique. If you’ve recently completed renovations or equipment upgrades, for example, your property may fetch a higher asking price than an older, similarly sized building. Aside from updates, we also like to ask owners the following questions:
- Does your property have parking? If you’re located in a densely populated city or downtown area, even a few spots can make a difference.
- Are you selling your business and the real estate or just the building? Business and building sales are handled very differently, and the sale of a profitable business can bump up the real estate price.
- Are you closer to a highway or easily accessible via public transit? If your building is located directly off a highway exit, you may be more valuable than a neighbor situated down the road.
Even though no one knows your building better than you do, a commercial real estate professional can help you accurately position your property while doing the heavy lifting. With just a few pieces of information, they can provide you with a simple property analysis that will help you understand your current value along with helping you identify potential improvements that would drive up your price.