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.
Here are the three key steps to valuing commercial real estate:
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.
First, let’s look at why determining commercial real estate value is important:
Next, we’ll look at the factors that can affect the value of your commercial property:
Here’s a deep dive into the key steps to valuing commercial real estate:
Collect all the relevant information you can find about your property, such as:
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.
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).
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.
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:
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.
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
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
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.
Choosing the best valuation technique for your property doesn't have to be complicated.
Here are some pointers to guide you:
Despite following the pointers given above, you may face some challenges when valuing your commercial property:
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.
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.
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:
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.
Here are additional questions you may have about valuing commercial property:
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.
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.
You can increase the valuation of your commercial property in various ways:
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.
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.
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
