Valuing commercial property is an important step in every commercial real estate transaction. This post will demystify the commercial property valuation process and walk you through some common valuation techniques used in the commercial real estate industry.
Before we dive into understanding commercial property valuation, let’s take a step back and ask a more philosophical question. What is value? Is commercial property valuation something set in stone, or is it more or less in the eye of the beholder? The answer is a little bit of both. On the one hand, valuation is not 100% set in stone, which is often why commercial property sales requires a negotiation period that can often last several weeks or months.
However, there is a mathematical way to arrive at a reasonable value range, based on the cash flows of the property. In finance, this is known as intrinsic value, and because owners of commercial property are typically investors, they will view their purchase of commercial property rationally. However, with that said, there is a component to value that is always in the eye of the beholder. When value becomes disconnected from the underlying fundamentals, it can often be for reasons that supersede cash flow, such as ego, sentimental value, or speculation about the future.
The first task in commercial property valuation is to build a real estate proforma. A real estate proforma is simply a projection of cash flows for a commercial property over your desired holding period. Once you have an accurate cash flow projection, you can then determine value using some common investment ratios, and ultimately a discounted cash flow analysis.
If you need some assistance with this, our web-based real estate analysis software can help you build a real estate proforma, value commercial property, and generate presentation quality reports.
Once a real estate proforma is constructed, most investors begin analyzing commercial properties by looking at some common measures of investment performance. These indicators are a quick and dirty way of determining whether or not to take a closer look at a potential acquisition.
Some of these simple measures of investment performance include the cap rate, cash on cash return, and gross rent multiplier. For a more in depth explanation of these ratios, check out our article on common real estate formulas you should know.
These simple ratios are fine for quickly assessing a property, but it’s important to understand that they have many shortcomings when it comes to valuation. The problem with just using simple ratios to value a property is that they don’t take into account changes in cash flow over time, nor do they account for risk and the time value of money.
Only a multi-period discounted cash flow analysis will help you account for variations in income due to lease expirations, reimbursements, abatement, rental rate and expense escalations, and other drivers of net operating income. Additionally, a discounted cash flow analysis will take into account an investor’s desired rate of return, unlike simpler measures of value.
Grasping the mechanics of a discounted cash flow analysis can be challenging at first, but it’s essential in understanding any commercial real estate transaction. To get more of a gut feel for what a discounted cash flow analysis is telling you and why it’s important, check out the Intuition Behind IRR and NPV.
To jump start your commercial property valuation, give our commercial property valuation software a spin, free for 30 days!
Source: How to Value Commercial Property
https://www.creconsult.net/market-trends/how-to-value-commercial-property/
Average of the top competitive rates from eXp Commercial's National Capital Markets Partner CommLoan from a database of 700+ commercial lenders as of 731/23
*Rates are provided for comparison purposes only. Actual rates are dependent on property and sponsor.
https://www.creconsult.net/market-trends/commercial-real-estate-financing-rate-snapshot-july-31st-2023/
Commercial real estate can be broken down into several different categories. At a high level, when people think of different types of commercial real estate, they typically think about shopping centers, office buildings, or warehouses. But the commercial real estate industry is much more precise when it comes to defining property types. Below is a list of different types of commercial real estate with a description of how each category is typically defined.
Classification. Office buildings are usually loosely grouped into one of three categories: Class A, Class B, or Class C. These classifications are all relative and largely depend on context. Class A buildings are considered the best of the best in terms of construction and location. Class B properties might have high quality construction, but with a less desirable location. And Class C is basically everything else.
Central Business District (CBD). Office buildings located in the central business district are in the heart of a city. In larger cities like Chicago or New York, and in some medium sized cities like Orlando or Jacksonville, these buildings would include highrises found in downtown areas.
Suburban office buildings. This classification of office space generally includes midrise structures of 80,000-400,000 square feet located outside of a city center. Cities will also often have suburban office parks which assemble several different midrise buildings into a campus-like setting.
Heavy manufacturing. This category of industrial property is really a special use category that most large manufacturer’s would fall under. These types of properties are heavily customized with machinery for the end user, and usually require substantial renovation to re-purpose for another tenant.
Light Assembly. These structures are much simpler than the above heavy manufacturing properties, and usually can be easily reconfigured. Typical uses include storage, product assembly, and office space.
Flex warehouse. Flex space is industrial property that can be easily converted and normally includes a mix of both industrial and office space.
Bulk Warehouse. These properties are very large, normally in the range of 50,000-1,000,000 square feet. Often these properties are used for regional distribution of products and require easy access by trucks entering and exiting highway systems.
Strip Center. Strip centers are smaller retail properties that may or may not contain anchor tenants. An anchor tenant is simply a larger retail tenant which usually serves to draw customers into the property. Examples of anchor tenants are Wal-Mart, Publix, or Home Depot. Strip centers typical contain a mix of small retail stores like Chinese restaurants, dry cleaners, nail salons, etc.
Community Retail Center. Community retail centers are normally in the range of 150,000-350,000 square feet. Multiple anchors occupy community centers, such as grocery stores and drug stores. Additionally, it is common to find one or more restaurants located in a community retail center.
Power Center. A power center generally has several smaller, inline retail stores, but is distinguished by the presence of a few major box retailers, such as Wal-Mart, Lowes, Staples, Best Buy, etc. Each big box retailer usually occupies between 30,000-200,000 square feet, and these retail centers typically contain several out parcels.
Regional Mall. Malls range from 400,000-2,000,000 square feet and generally have a handful of anchor tenants such as department stores or big box retailers like Barnes & Noble or Best Buy.
Out parcel. Most larger retail centers contain one or more out parcels, which are parcels of land set aside for individual tenants such as fast-food restaurants or banks.
Garden Apartments. Suburban garden apartments started popping up in the 1960s and 1970s, as young people moved from urban centers to the suburbs. Garden apartments are typically 3-4 stories with 50-400 units, no elevators, and surface parking.
Midrise Apartments. These properties are usually 5-9 stories, with between 30-110 units, and elevator service. These are often constructed in urban infill locations.
Highrise Apartments Highrise apartments are found in larger markets, usually have 100+ units, and are professionally managed.
Full service hotels. Full service hotels are usually located in central business districts or tourist areas, and include the big name flags like Four Seasons, Marriott, or Ritz Carlton.
Limited service hotels. Hotels in the limited service category are usually boutique properties. These hotels are smaller and don’t normally provide amenities such as room service, on-site restaurants, or convention space.
Extended stay hotels. These hotels have larger rooms, small kitchens, and are designed for people staying a week or more.
Greenfield Land. Greenfield land refers to undeveloperd land such as a farm or pasture.
Infill Land. Infill land is located in a city has has usually already been developed, but is now vacant.
Brownfield Land. Brownfields are parcels of land previously used for industrial or commercial purposes, but are now available for re-use. These properties are generally environmentally impaired.
The above categories of real estate cover the major types of commercial real estate. However, there are plenty of other types of commercial real estate that investors construct and own. Examples of special purpose commercial real estate include self-storage, car washes, theme parks, bowling alleys, marinas, theaters, funeral homes, community centers, nursing homes, and churches.
Source: Types of Commercial Real Estate
https://www.creconsult.net/market-trends/types-of-commercial-real-estate/
There are a number of reasons why people decide to sell their multifamily property, but most can be categorized into three groups: Problems, Opportunities, and Changes.
With this decision though comes the consideration of capital gains tax and how to ensure you are getting the most for the sale of your property.
There are several reasons why people do sell:
Problems:
Opportunities:
Changes:
There are several options for sellers to defer or minimize capital gains taxes:
We not only market properties for sale. We make a market for properties we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites with direct outreach to our investor database and an orchestrated competitive bidding process that yields higher sales prices.
Contact Us to discuss what information is needed to complete a Complimentary Commercial Broker Opinion of Value (BOV).
This is understandable as only about 5% of the market trades in any given year. We are also happy discuss any purchase or refinance interests and recommend some physical and operational changes you can make to add value to your property you will appreciate when you eventually sell.
eXp Commercial Chicago Multifamily Brokerage focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.
We don’t just market properties; we make a market for each property we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites for maximum exposure combined with an orchestrated competitive bidding process that yields higher sales prices for your property.
https://www.creconsult.net/market-trends/why-should-i-sell-my-multifamily-property/
Real estate investors have done well. Rents have risen and home price appreciation has been quite exceptional. In the past three years, the typical rental rate and typical home price have soared by 16.4% and 35.5%, respectively. Over the past five years, those figures are 24.9% and 50.8%. These returns were occurring at a time of low-cost financing.
Now it’s time for investors to sell. Home prices have already retreated in some markets—especially in the west, where the median price is 8% lower than a year ago.
There are 44 million renter households: Half live in midsized to large apartment buildings, while the other half rent single-family, duplex, triplex or quadplex units. Although apartments are not necessarily as competitive as single-family rental units, a 40-year high in multifamily construction means many units will be hitting the market in the upcoming months and into next year. Rent growth has already turned the corner from acceleration to deceleration, still rising in most markets but at a slower pace. Looking at single-family construction, builders are still underproducing compared to the historical average, but new-home sales are back to pre-COVID levels. Home builders are making profits, stock prices for publicly listed construction companies have risen by around 50% in the past year, and inventory of new homes is plentiful.
That’s not the case for existing homes. The latest inventory of 1 million is a historic low, and that’s hindering existing-home sales. Multiple offers are still happening on mid-priced homes. We need 50% growth in listings to reach pre-pandemic 2019 levels. We need 100% growth to reach an adequate supply. This is where investors come in—or rather, come out. The National Association of REALTORS® is calling for a federal incentive to help bring needed inventory to the market: temporary capital gains relief for investors who sell to a first-time buyer or first-generation buyer.
Source: Good Time for Investors to Unload
https://www.creconsult.net/market-trends/good-time-for-investors-to-unload/
