Maximize Commercial Property Value: Methods, Estimator & Tips
Like other valuations, determining the value of your commercial property is an art and science that is best accomplished with the right professional help.
While you can easily find a good professional commercial property appraiser, finding the best experts to help you sell the property can be challenging.
In this guide, we explore how to determine commercial property value accurately, increase its value, and even find the right experts to help you sell it successfully.
TL;DR - How to Value a Commercial Property
Here are the three key steps to valuing commercial real estate:
Gather internal and competitor property information.
Apply valuation methods.
Consolidate results for the final valuation.
We'll dive deeper into these steps later in the article.
If you find these steps tedious, you can hire professional commercial property valuers.
They can help you value your commercial property, including writing a detailed valuation report you can show to potential buyers, lenders, or investors.
However, if you want to sell your property, you need more than property appraisers. Since it's a business, you would need the help of business selling experts like investment bankers, wealth advisors, M&A lawyers, and financial accountants.
We at Exitwise can help you hire the best M&A experts in the real estate industry to assist you with the sale process.
Schedule a chat with us today to discuss hiring and working with real estate M&A experts for a faster sale at the best price possible.
Importance of Valuing a Commercial Property
First, let’s look at why determining commercial real estate value is important:
Fair Pricing: Valuation helps you determine the fair market value of your commercial property. You can avoid underselling and losing money or overpricing and scaring away potential buyers or investors.
Making Informed Decisions: A valuation helps you decide when to sell your business property. Potential investors and buyers can use the valuation to determine if your property is worth investing in. Lenders can gauge creditworthiness based on the valuation if you want a loan for improvements.
Ease of Negotiating: Knowing the value of your property can help you negotiate a favorable sale price. Potential buyers can see a detailed, impartial valuation report that justifies the valuation and asking price. Your transparency in the valuation and pricing can win their trust, making negotiations easier.
Informing Value Improvement Strategy: The valuation can show you areas for improvement to increase the property's value. For example, you can create a strategy for repairs and maintenance or to maximize occupancy rates.
Factors Influencing Commercial Real Estate Value
Next, we’ll look at the factors that can affect the value of your commercial property:
Market Conditions: When demand is high in an area, and there aren't many properties for sale, your property can command a higher value and sale price.
Location and Accessibility: In real estate, it's all about location, location, location, location. Properties in prime locations, like commercial business districts, usually have higher valuations due to potential future growth and lots of foot traffic. Your property can also fetch a higher valuation if it's close to amenities and major communication and transportation infrastructure.
Property Condition: A large, newer, and well-maintained property with modern facilities can be more valuable.
Zoning and Regulatory Aspects: If your property is suitable for the specific type of commercial activities set for that location, you can enjoy a higher valuation.
Income Potential: Your commercial property's market value can be higher if it attracts commercial tenants and maintains high occupancy rates, which can translate into higher revenues.
How to Value a Commercial Property
Here’s a deep dive into the key steps to valuing commercial real estate:
1. Gather Internal and Competitor Property Information
Collect all the relevant information you can find about your property, such as:
The documents needed to sell commercial real estate
The correct property type (whether it's an office building, industrial space, or retail center)
The size and layout (total square footage, square footage per unit, and the floor plan to show the layout)
Location (evaluate the property's location vis-a-vis competitors, social amenities, and transport infrastructure)
Financial history (collect data on rental income, occupancy rates, tax records, and operating expenses)
You should also collect all relevant information about the properties owned by your competitors, such as the sale prices of recently sold properties, location, size, age, and tenancy rates.
2. Apply Valuation Methods
Once you have the necessary information, you can calculate the commercial property value using methods such as the income capitalization method, gross rent multiplier, etc. (discussed below).
3. Consolidate Results for the Final Valuation
Combine the results from the different commercial property valuation techniques to obtain a final value.
If necessary, adjust for specific circumstances to fine-tune the final value. For example, your property may have an above-average tenant retention rate, which can be a unique reason to increase the valuation.
Commercial Property Valuation Methods
Depending on the information you have, here's how to calculate commercial property value using one or a combination of several of the following methods:
1. Income Capitalization Method
Also called the income approach in real estate valuations, the income capitalization method applies a market-derived capitalization cap or cap rate to a property's net operating income.
The net operating income is what remains after deducting all operating expenses.
Here's the formula:
Commercial Property Value = Annual Net Operating Income ÷ Capitalization Rate
For example, if your property has an annual operating income of $500,500 and the cap rate for retail properties is 6.54%, you'll calculate the value as follows:
Commercial Retail Property Value = $500,500 ÷ 6.54% = $7,652,905
You can use the income approach for office, retail, and multifamily property valuations.
2. Gross Rent Multiplier
Also a relative valuation method, the gross rent income multiplier technique compares your property's rental income to that of similar properties in the area.
However, unlike the income capitalization method, this method uses the total income before deducting operating expenses.
Let's have a quick example. Assume you are conducting a commercial building appraisal.
The building has 10,000 square feet of rental space. You've established that your area's average gross income per square foot per month is $12.
Here's how to find the value of the commercial property:
Estimated Commercial Property Value = Footage x Gross Monthly Income per Square Foot x 12 Months
= 10,000 x $12 x 12 = $1,440,000
Assuming an average annual vacancy rate of 10% in the market, the valuation changes to:
Commercial Property Value = $1,440,000 x 90% = $1,296,000
3. Sales Comparison Approach
Also called the market approach in real estate valuations, the sales comparison approach contrasts the recent sale values of similar properties in the same market.
You can make any significant adjustments for unique characteristics. For instance, your property may have improved modern technology and systems more than others.
Here's the formula:
Commercial Property Value = Price of Comparable Properties ± Adjustments
4. Cost Approach
The cost approach is also called the replacement cost method. In this method, you estimate the value of a commercial property based on the cost of building a similar property from scratch in that area.
Here's the formula:
Commercial Property Value = Land Value + Cost to Replace Structure - Accrued Depreciation
You can use the cost approach for a brand-new property or when you can't find comparable properties.
How to Choose the Best Valuation Method for Your Property
Choosing the best valuation technique for your property doesn't have to be complicated.
Here are some pointers to guide you:
Nature of the Property: Income-producing properties like retail stores and apartments can be valued using the income capitalization method.
Age of the Property: The cost approach can be used for new or recently built properties since construction costs are readily available.
Available Information on Other Properties: The sales comparison method is ideal if you have plenty of information for a detailed analysis of other similar properties.
Challenges in Determining Commercial Property Value
Despite following the pointers given above, you may face some challenges when valuing your commercial property:
Market Volatility: Frequent fluctuations in interest rates and overall real estate market trends can significantly affect property valuations. You may find it difficult to predict future property valuations accurately.
Data Unavailability: You may find it difficult to access suitable comparable sales data that closely matches your property's unique characteristics.
Condition Assessment Hurdles: Accurately evaluating the physical condition of a property can be difficult.
Achieving Accurate Commercial Building Valuation
Determining the value of your commercial property accurately often requires a combined approach.
For example, you can use relative valuation techniques, which compare the property to similar ones in the market, and absolute techniques, which consider the property's intrinsic value based on its income potential.
Additionally, you can use commercial property appraisal calculators or software to estimate the value before hiring professional appraisers.
Commercial Property Value Calculator
A commercial real estate value calculator is an excellent starting point for getting an estimated value for your property.
Here's a commercial property value calculator you can use to estimate value based on income and capitalization rate.
Commercial Real Estate Valuation Software
You can use commercial real estate valuation software for a more detailed outcome. For example, you may access a detailed valuation report, evaluate multiple properties simultaneously, and forecast cash flows.
Here are some common commercial real estate appraisal software to try:
Commercial Real Estate Appraiser
A professional appraiser is useful when you want an official valuation for external purposes such as acquiring credit, attracting investors, or selling your property.
However, selling commercial real estate property requires more than just a valuation. Besides the appraiser, you must hire real estate M&A experts like wealth advisors, tax accountants, and investment bankers.
These experts have extensive experience and expertise in selling properties, and they can help you sell yours at the best price possible.
At Exitwise, we can help you find and work with the best real estate M&A experts to ensure the sale goes smoothly and your business interests are well-protected.
Reach out to our team today to learn more about hiring and working with M&A experts to ensure a successful sale.
Frequently Asked Questions (FAQs)
Here are additional questions you may have about valuing commercial property:
How Is Commercial Property Valuation Different from Residential?
Commercial property valuations rely heavily on the property's potential income from an investment perspective.
Residential property valuations focus primarily on market-based comparisons for similar homes rather than potential income because residential properties aren't typically seen as businesses.
Can I Do a Commercial Property Valuation Myself?
You can do a basic valuation yourself using the sales comparison method or a commercial property value estimator.
However, you will need a professional appraiser for an accurate and more objective valuation, especially for a complex property. They bring years of experience and expertise in valuing property.
How Can I Increase My Commercial Property’s Valuation?
You can increase the valuation of your commercial property in various ways:
Increasing rent to raise more revenue (if the situation allows)
Minimizing operating expenses
Making strategic improvements and renovations, such as updating technology and security systems
How Much Does a Commercial Property Valuation Cost?
The cost of valuing commercial property can vary widely, depending on the property, location, appraiser, and the purpose of the valuation.
Generally, the cost can be as low as $500 or as high as $10,000 or more.
Conclusion
While you can obtain a commercial property estimate value independently, it is better to work with a professional commercial real estate appraiser for formal valuation.
But, if you want to sell your property, an appraiser alone won't be enough. You'll need real estate M&A experts to help you.
Fortunately, you don't have to worry about finding the right experts. When you work with us at Exitwise, we'll help you find and collaborate with the best real estate M&A experts for a smoother property sale.
Chat with us today to find the M&A experts you need to sell your commercial property swiftly and at a better price.
