When it comes to understanding the actual or potential value of a commercial property, there are a few different approaches to take. At one end of the spectrum, you can rely on instinct and experience to make decisions; at the other end, you can take a deep dive into all available commercial real estate data and act accordingly. Most real estate brokers operate in a vast middle ground between these two extremes. They seek, in other words, to make sound decisions based on a combination of common sense and deep, analytical data.
At the end of the day, what makes a commercial property valuable? In this blog, we’re exploring this very question. We’ll introduce you to the most common valuation methods, the main factors that can impact a property’s value, and some insights you can use to determine whether or not a specific property’s worth the investment.
How Do You Calculate the Value of a Commercial Property?
Commercial real estate brokers employ a variety of real estate valuation methods when determining a particular property’s value. The most common methods of how to calculate property value include the cost, income, sales comparison, and gross rent multiplier approaches.
- Cost: The cost approach is a relatively straightforward way to project the fair market value of a new commercial property. It calculates a projected value based on the land price plus any new construction costs. While this calculation is simple, it doesn’t necessarily tell the whole story. For example, it doesn’t consider any potential rental income—nor does it involve sales comps for added context.
- Income: The income approach considers forecasted rental income based on a property’s cap rate (the rate of return on a real estate investment property based on the income that the property is expected to generate), as a means of determining its fair market value. It calculates value based on a formula that divides the property’s net operating income (NOI) by the cap rate (which is determined based on comparable properties). Because it can be applied to any property that’s expected to produce predictable and consistent income, it’s likely the most frequently-used commercial property valuation method.
- Sales Comparisons: Rather than calculating a property’s fair market value, the sales comparison (comp) approach is a popular method for determining a property’s estimated market value. It uses a number of factors to determine property value, including the selling prices of recently-sold properties within the market and asking prices of current, listed properties. This approach depends on current and accurate data to enable accurate valuations.
- Gross Rent Multiplier: This approach is similar to the income approach (described above), with one main difference. Where the income approach was based on a property’s NOI, the gross rent multiplier formula instead uses a gross rent multiplier (GRM) figure, which is then multiplied by annual gross rents.
Each of these methods provides useful insights, and they work best in tandem with one another. This way, a more fully-formed, 360-degree view into a commercial property’s value can be attained. Canyon Data brings each of these together, and more. Our qualitative rating system provides an excellent jumping-off point for property valuation, taking a number of factors into consideration and using an easy-to-understand rating hierarchy that ranges from Excellent to Fair.
What Are the Main Factors Influencing Commercial Property Value?
Since commercial property is a broad enough real estate category to include a wide variety of property types and revenue possibilities, it should come as no surprise to learn that a number of factors can impact a given property’s value. Going beyond the obvious—including the valuation methods described above, as well as location, location, location—additional factors include:
- Interest rates: Large investments—like commercial real estate—often require the use of credit. When interest rates are high, securing credit can be more difficult. As a result, properties usually sell at a lower value (to offset the difference in interest).
- Economic conditions and outlook: Commercial property values are impacted by local, state, and national economic conditions, including Real Gross Domestic Product (Real GDP), inflation, wage and job growth, unemployment rates, and other indicators. On a related note, property market performance also impacts valuations. For example, investors may look to avoid or even leave certain areas when factors like high taxation or municipalities aren’t deemed development-friendly.
- Supply and demand: When there’s less demand for commercial properties, valuations decrease in response. Conversely, high demand often leads to higher selling prices.
- Population and demographics: Area-specific factors like population growth, age distribution, and education levels can make certain areas or properties more attractive to savvy investors.
- Size, facilities, and aesthetics: These details all play a role in a property’s perceived value. Even a big, beautiful building will only have limited value if it lacks the necessary amenities or facilities for specific uses.
- Zoning details: Viewing zoning maps, flood maps, and opportunity zones can help to further gauge the possibilities of a given property or properties.
- Maintenance and renovation: If a particular building’s a real fix-me-up, the costs of maintenance, improvement or outright renovation can have an outsized impact on its value.
How Do You Know If a Commercial Property Is a Good Investment?
The main ways to know if investing in a specific piece of commercial property will be a good investment include crunching the numbers with one or more valuation calculation methods, considering the property’s specific features and opportunities, and talking with a commercial real estate broker.
The unfortunate truth is that a large subset (around half) of the available CRE data resources out there provide outdated and inaccurate information—a far cry from Canyon Data’s updated and verified datasets. At the end of the day, to better understand the figures and their context, it’s always a good idea to chat with a commercial real estate broker or other professional expert. Simply put, their expertise and experience can prove invaluable when it comes to putting the details into context so you can really understand a particular property’s potential.
Better Data = Better Valuations
We’ve come a long way since the days of instinct and guesswork. Today, the real key to developing accurate commercial real estate valuations and making wise investments is a foundation of complete, accurate, and up-to-date data. And that, it just so happens, is what Canyon Data is all about—providing data that has been verified, validated, and visualized.
- Verified: Our data is updated every 30 days to ensure you are getting the most current information and market activity.
- Validated: Every property undergoes a thorough, 5-step verification process to ensure you are getting updated, verified, and quality data.
- Visualized: Get all the information you need in a single platform containing an unparalleled dataset.