The Value of Commercial Properties
Commercial real estate is a great market to work in. However, it can be tricky to set commercial real estate values. In the commercial market, it’s not just about location, size, and features. The valuations of commercial properties involve many more numbers, and they’re arrived at via fairly complex calculations. Figures like occupation rates are key and affect the amount of rent a landlord will connect monthly.
When valuing commercial real estate there are lots of considerations. The total size of a property must be considered, and the number of units. The total rent at full capacity must be calculated. Expenses like total utilities and insurance need to be figured, too. Understanding the gross potential rent or space is a must for would-be investors. They want to estimate their ROI. Figures like price per square foot are a must for potential tenants, especially in industries like retail.
A shorthand way of valuing a commercial property is simply to count the doors. This is known as the value per door. For example, if a building with ten apartments sells for $1 million, the value per door is $100,000. This figure can then be used to get a ballpark value on similar apartment buildings in the area. In this imaginary neighborhood, a building featuring 12 apartments would have an estimated value of $1.2 million.
In terms of setting a value, there are many ways of doing it. The cost approach to commercial real estate adds the value of the land and the cost of the structure situated on it. The income approach is arrived at via an equation. It divides net operating income by the estimated cap rate. Similar properties in the area are used to calculate the cap rate. Other approaches include the market approach, where recently completed sales and current asking prices are used to help arrive at a value.
Finally, there’s one type of valuation that matters, and that’s assessed value of a property. This figure is determined by county tax professionals. It’s used to determine how much the owner will pay in property taxes. Typically, the assessed value of a commercial property remains rather stable over time. In general, the commercial market does not fluctuate as much as the residential market.