Has Commercial Property Dropped in Value?

If you’ve spent much time online trying to find clear answers around commercial property values and whether they’re forecast to increase or decrease, you’ve probably found it difficult to find clear and complete data. Our new blog breaks down the types of data you need to assess commercial property value, and some trends to be aware of for 2022 and beyond.

Whether you’re a broker, developer, investor, appraiser, lender, property manager, asset management company, or general contractor, finding and analyzing commercial real estate data can be difficult—even more so if you’re looking for accurate data.

It’s important, though. In this blog, we’ll answer a few key questions on the topic, including:

  • What determines commercial property value?
  • What are the commercial real estate trends for 2022 and beyond?
  • Is commercial real estate a good investment right now?

What Determines Commercial Property Value?

When it comes to the valuation of commercial property, there are a number of factors that have an impact, making general guidance around property value tough to pin down. Among the most important factors that can have outsized impact on commercial real estate value in 2022 include:

  • Surging investor interest and an increased demand (and lower supply) for investment properties
  • An increase in office vacancies as pandemic recovery continues
  • Changes in federal loan types, rules, and processes
  • Adoption of new technologies for more robust market intelligence
  • Impact of environmental, social, and governance (ESG)
  • Available capital for investment
  • Unpredictable valuation figures
  • Inflation rates
  • Uncertainty around brick-and-mortar retail locations

With so many factors, some more predictable than others, how do you begin to determine a commercial property’s value with any accuracy? There are a few different methods to consider, so let’s take a quick look at some of these next.

How to Determine Commercial Property Value

A few examples of fair market valuation methods for commercial property include methods based around cost, income, comparative market analysis, and the gross rent multiplier approach. Here are the basics of each approach:

  • Cost: Considers the building or buildings’ construction costs, plus the price of the land it’s on
  • Income: Considers the projected rental income divided by the property’s cap rate (based on market sales of properties of comparable characteristics and location)
  • Sales comparison/market: Compares market conditions by looking at the selling prices of comparable, recently-sold properties vs. the asking price of currently-listed, comparable properties
  • Gross rent multiplier: Similar to the income approach, but instead of using the net operating income (NOI) it uses the gross rent multiplier (GRM) figure

Each of these determiners has its own uses and advantages, but real understanding comes when you can leverage multiple considerations at once. This is what Canyon Data, with its 150 unique data points, was built to accomplish.

How Much Do Commercial Properties Appreciate Per Year?

A commercial property’s income potential is a useful starting point for understanding whether it’s likely to appreciate in value over time. While many factors impact the actual appreciation or depreciation of value, commercial properties do typically increase in value from one year to the next. 

One figure pegs the annual return on commercial properties as being between 6% and 12%—depending, of course, on factors from the economy at large as well as unique factors (responding to a global pandemic, for example).

The US commercial property price index for 2014 through 2021 shows a rise in the value of commercial construction. In the second quarter of 2021 alone, the price index reached a figure of 194.7—nearly double 2010’s figure of 100.

What Are the Commercial Real Estate Trends for 2022 and Beyond?

Past and present data is useful for understanding the context around commercial property value and how it’s determined. It’s also important to consider the trends and expert predictions for 2022 and beyond.

So, what are the trends to know about for different types of commercial properties? Read on for the answers.

Trends & Outlook: Retail

With the ups and downs and general unpredictability of the COVID-19 pandemic, retailers have had to think long and hard about how to make it through the uncertainty. While many brick-and-mortar retailers found new ways to keep their stores afloat, many fared worse, ultimately shutting down for good. That being said, not all retail-use commercial property was affected by the pandemic. For example, Walmarts, Krogers, and drugstore chains weren’t hurt by the pandemic—rather, since they provide essential goods and services, they have no reason to fret about their commercial property values through 2022 and beyond.

Trends & Outlook: Industrial

If you think back to how your shopping and buying habits have changed over the course of 2020-21 (or read the point above about retail space), it shouldn’t surprise you to read that the demand for warehouse space (and other essential facilities for shipping and logistics) has been trending upward. More people are shopping online, and it’s not just Amazon. Other major commerce hubs like Walmart, Kroger, and others have also ramped up their ecommerce, further increasing the demand for (and value of) these properties.

Trends & Outlook: Office

he pandemic has dragged on, more organizations adapted by letting employees work remotely from their own homes. While it wasn’t always a smooth transition (with many companies scrambling to figure out how to transition certain roles to remote work), once companies got their footing, they began to realize the myriad benefits.

Trends & Outlook: Multifamily

Thanks to steadily-rising mortgage rates and home prices, the market for multifamily rental properties is expected to continue to experience an increase in demand. Investing in this type of property is a relatively safe move, especially when you consider how increasing rent rates also improve the profitability of such an investment, with more opportunity to recoup initial costs. When it comes to just how much growth is expected in the rental market, one report projects growth of about 10% over the course of 2022.

Is Commercial Real Estate a Good Investment Right Now?

This is the million-dollar question, isn’t it? To get a sense of the big picture, we can start by digging into a little bit of data from the National Association of Realtors 2021 Forecast. At the time of its publication, commercial property values were increasing, recovering (in part) from the COVID-19 pandemic, which had caused values to decrease by an average of 6% from 2020 to 2021.

Fast-forward to late 2021; are commercial properties going up in value? Over half a year after the forecast cited above, the National Association of Realtors (NAR) found that values were, in fact, continuing to rise, furthering the industry’s overall recovery. They advise caution, though, as the pandemic is not over, making it difficult to provide a firm idea of where things are going. That being said, as we discussed above, many types of commercial properties are trending toward increased value.

The Importance of High-Quality Data—and the Canyon Data Difference

You’ve surely gotten the point by now that high-quality data is a pretty non-negotiable piece of the property valuation process. The good news is that the kind of data needed to make the right decisions is largely available through various databases and other sources. The bad news is that there is a lack of up-to-date, complete, high-quality data—the kind of foundation needed for prudent decision-making. These issues impact nearly half of the available data. Not only that, but the process of connecting the dots to really analyze and interpret the data can be maddening. 

What makes Canyon Data different, then? Unlike other companies that simply scrape data from open-source websites and platforms (taking a quantity over quality approach), we’re here to provide commercial real estate data you can trust. 

At Canyon Data, we provide the accurate, complete data that brokers, developers, investors, appraisers, lenders, property managers, asset management companies, general contractors, and more rely on to make sound decisions about how to get the most from your investment. It’s actionable data that truly makes a difference.
If you’re ready to learn more about what makes our data different or how to leverage our services, let’s chat!

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