If you are looking to purchase or sell commercial property, you probably understand the importance of really understanding its value. Your ability to successfully complete your commercial transaction rests largely upon the determined value of your building. Even if you are in a position where you don’t need to secure a lender, you will still want to know whether or not your initial investment is worth it. If you are selling your space, your buyer will also want that information. Regardless of which type of commercial property you are looking at, factors such as the current state of the local market, the going price for available comparables, and the overall maintenance costs associated with the property will affect its value. With so much to consider, how do you value it correctly? Read on to learn some of the more common approaches to properly valuing commercial property.
The Cost Approach
In the event that a commercial property finds itself standing alone in the market (as in there just aren’t enough comparable properties to gauge its potential value), this method will likely be used. It is also often the chosen method in the event a remodeled building has added substantially to the value of the land underneath it. The cost approach of valuation takes into consideration the raw costs that would need to be considered to rebuild the structure from the ground up. This includes the cost of the land, necessary building materials, labor, and any other expenses that might arise in the rebuilding process.
Income Capitalization Approach
If research shows that there is a sufficient amount of comparable commercial property in your area, the income capitalization approach might be used to determine your property value. This method uses the capitalization rate (often shortened to cap rate) to estimate the property’s potential income. The cap rate is found by taking the net operating income of the property and dividing it by its sales price. For example, if a property has a gross potential income of $300,000 and a 10% vacancy factor of $30,000, the effective gross income for that property will be $270,000. Take from this the assumed operating expenses of the company (let’s say $100,000) and you are left with your Net Operating Income (NOI) of $170,000. Divide this by a cap rate of, let’s say 8%, and you will arrive at your fair market value of $2,125,000.
Sales Comparison Approach
Another common way to value commercial property is by using the sales comparison approach, oftentimes referred to as the market approach. This is most commonly seen in residential real estate, but has also been known to offer a good estimate for certain types of commercial space. The value here is based heavily on the recent sales data in the local area for properties that can be considered comparable. This approach can be somewhat more difficult if the local market is slow and there is a lack of comps.
Value by Door
A much less common method of valuing commercial property is the value by door approach. This is used more specifically for apartment buildings and uses the number of units within a particular building to determine the worth of the property. A building that had 50 units and was put on the market for $8 million, for example, would be valued at $160,000 per door, regardless of the size or condition of the individual unit.
Value Per Gross Rent Multiplier
Another far less common approach to valuing commercial property is the Gross Rent Multiplier (GRM). This method considers the price of the property and then divides it by its gross income. It is more commonly utilized in the event that the property in question has a low price relative to its market-based potential income.
Which Way is the Right Way?
When it comes down to it, the only way to determine which of these valuation approaches is best for your property is to look at the current market and the type of commercial property in question. It will vary greatly from one transaction to the next. Even in the perfect market, it’s also important to remember that real estate value is somewhat subjective based on the assessor.
Are You Looking for Commercial Property in Hattiesburg or the Surrounding Areas?
If you are in the market to purchase, sell, or lease commercial property, the experts at SVN | Southgate Realty, LLC are here to help. For over 37 years, our team of dedicated Advisors has paired our thorough understanding of the local market with a competitive edge that helps our clients get exactly what they need. Take a look through some of our available properties today and contact a team member to get your search underway!