How Do Comps Affect CRE Property Values?

Have you ever stopped to think about how the value of a piece of property is determined? Of course, things like size and condition come to mind, but so do characteristics like location. And, when you’re looking at commercial real estate (CRE), factors like leases, vacancy rates, and the types of tenants come into play as well. It’s a complex process that relies on data—and lots of it. 

That’s where sales comparisons (or sales comps) come into play. They’re one of a few commonly-used approaches to establishing property valuation. In this blog, we’re exploring what sales comps are, why they’re important, and how quality commercial real estate data can help investors, appraisers, and lenders alike determine a more accurate valuation.

What Are Comps?

Commercial real estate comps help real estate professionals and investors understand the market valuation of a property. They are established by comparing one property to several others—typically at least three or four—with similar features to assess the potential market value. The use of sales comps, sometimes called the market data approach, has long been an industry standard for assessing property value in the residential real estate market. However, the commercial real estate industry is increasingly finding value in this method as well, and the need for accurate data to inform these sales comps is critical.

Sales comps in commercial real estate consider a number of different factors in order to build as accurate of a comparison as possible. This includes, but is not limited to, the following types of data:

• When was the property sold? Ideally, comparable properties should have been sold within the past year. 
• Where, exactly, is the building located? Even with a single city, valuations vary from neighborhood to neighborhood.
• What building-level data is available? What is the square footage? How many rooms or offices are in the building? 
• What is the vacancy rate? How many offices or spaces are leased, and what are the terms of the lease? Triple net leases, for example, are desirable to investors and can increase market valuation.
• What are the property conditions? Information like the construction grade, how recently renovations were made, and even landscaping details can impact market value.
• What are the terms and conditions of the sale? Was the sale of a comp made under financial duress? How was the market performing during the sale? These can significantly impact the price and could skew any comparisons.

How Do Comps Affect CRE Property Values?

To put it simply, comps affect CRE properties by raising or lowering their market value. If a property is compared to one or more properties that look similar but are actually very different, it may not receive an accurate valuation. In other words,  incomplete, inaccurate, or out-of-date comps could needlessly cause the value of a property to increase or decrease. For this reason alone, establishing an accurate comp sheet in real estate for a commercial property is crucial for everyone involved. 

Real estate professionals use CRE comps to establish a listing price for a property. Setting a price too high—or too low—due to incomplete or faulty comps could scare away investors or result in lower profits for the seller. Having accurate sales comps will ensure the listing price will attract the right buyers and maximize profits.

But it doesn’t stop there. Many commercial real estate investors use comps to determine if purchasing a property is a prudent investment and a good fit for their real estate portfolio. Operating off comps that are out of date or don’t show the full picture could result in a poor financial decision or a missed opportunity.

What’s more, lenders typically require sales comps during the underwriting process when providing financing for investors. Generally, commercial loan-to-value (LTV) ratios fall between 65% and 80%.  An appraiser’s property valuation via comps helps lenders determine how large of a loan they will provide, interest rates for the loan, down payment requirements, and more.

In summation, when asking questions such as, “How important are real estate comps for commercial properties?,” the answer should be abundantly clear; they’re one of the most important pieces to providing a full picture of a property’s value. And accurate, up to date data is the best way to get there. That’s where Canyon Data can help.

How Do You Find Comps for Commercial Real Estate?

Traditionally, those wishing to find a comp for a piece of real estate had to do it the manual way. That meant hours or days of digging through an assortment of historical real estate information and public property data to find all necessary information to build out comparisons. Brokerages often utilize their own internal database to assess and gather comps, and while this can be effective they are limited to their transaction history. Brokers  can also try to obtain data from other brokerages who are willing to share—but as the industry well knows—this rarely happens. Now, there’s a better way. 

Canyon Data provides the most exhaustive set of commercial real estate market data available. With our proprietary processes—which use robotics, artificial intelligence, human collaboration, and local researchers—we are capturing a more complete dataset than anyone else in the industry. And we take it one step further. Our monthly verification processes overcome the 40-50% data inaccuracy problem that persists in the CRE space, giving you access to better data and more accurate sales comps to aid in strategic decision making. What’s more, Canyon Data offers subscribers direct access to their local research team. If a comp or data point is needed, all it takes is a simple phone call. In 24 hours or less, subscribers are given the information they require.    
With a subscription to Canyon Data, you can finally stop asking, “How do I get accurate comps?” and start accessing real, current data you can trust. Learn more about our data subscription services or subscribe today.