Determining Accurate Commercial Property Values

The business of selling rental properties, business locations, industrial facilities and well-located parcels of property suitable for building new business is nothing new. For as long as commerce has existed, the need for a place to conduct that commerce and house the labor forces that will operate them, has been on the minds of business owners and investors. Determining fair prices was not always easy to do, however. Fortunately, modern record keeping practices and technology has made it easier than ever before to record, track and compute commercial property values, helping to fuel a strong commercial real estate market. 

What Factors Influence Commercial Property Values?

While a seller can certainly name the asking price of their choice, a buyer will want to see some proof that they are paying a fair price for a particular property, before they agree to buy. One of the best ways to do this is to examine and compare recent sales data, remembering to make sure that the comparisons are done on properties that have the same type of usage, and are as similar to each other as possible. For instance,comparing the commercial property values of a multi-unit apartment building to a retail business location would not provide a good comparison. By using the appropriate computations, it would, however, be perfectly acceptable to compare two apartment buildings or two warehouse properties, even when they have different features. See tips for how to find commercial properties for sale using creative methods. 

Data to Consider When Comparing Commercial Real Estate Properties

• Income, such as rent. If the building contains multiple retail spaces or apartments, for instance, the gross scheduled income would be the sum total of all the rents. Figuring the gross net income would add up all the rents collected for a certain period of time, and then subtract all the expenses generated during that same time frame.
• Vacancy rate. If the vacancy rate is unusually high for the area, or there is a problem with collecting rent from existing tenants, it can be a sign that a problem exists with the management of the building. 
• Expenses, such as repairs, maintenance, taxes, insurance, utilities, and management fees have a direct influence on commercial property values, and affect the interest that the property will garner when offered for sale.
• Traffic count and location are major considerations when valuing property. In addition, values can also be affected by historical and geographical issues, as well any forseeable future changes that may be coming to the area, such as changes in zoning laws. 

Common Methods Used to Compute Commercial Property Values

• Capitalization Rate - In general, the capitalization rate, or CAP rate, is determined by dividing the net operating income by the price. 
• Gross Rent Multiplier - Particularly valuable as a tool for valuing multiple units buildings, the gross rent multiplier, or GRM, is simply a comparison of the sale price or value of a particular property to the gross rental income it produces. 
• Cost Per Unit - A very simple valuation tool, cost per unit is computed by dividing the asking or selling price by the number of units. It is also possible to reverse this equation and determine a possible asking price by multiplying the number of units times the current market price of a single unit. 
• Price Per Square Foot - This computation is particularly useful when comparing retail, industrial and warehouse space. Price per square foot is simply the selling or asking price of a property, divided by the actual amount of square footage.  

Fair pricing, supported by the solid data of local comparisons is an important part of tracking commercial property values and boosting the activity level of any commercial real estate market. Buyers, sellers, agents and the community will all benefit when verifiable records and data come together to help support property values and bolster the growth of the area, as a whole.