Valuing Commercial Property

There are 3 ways when it comes to valuing commercial property that you should be aware of and by no means are they absolutes. Why? Because market conditions can have direct affects on valuation principles such as comparables. Here are the 3 approaches to value:

1. Cost Approach to valuation

Using the cost approach, investors or buyers will calculate how much it would cost to build the subject property at the current market’s prices. Remember , we said the market can affect and influence this approach?  After that is done, they would subtract the depreciation for commercial property and add to that figure the current rent value of the site.

2. Comparable Sales Approach

In Texas, a brokerage firm or Realtor does not have to reveal sales of a commercial property. This is probably the most popular request among Buyers and Investors. However, sometimes it is not easy valuing commercial property because the data is not there. Using the comparable sales approach, a Buyer or Investor will compare the subject property with other similar (comp) properties that have recently sold.  You can adjust prices for the positive and negative features of each of the comps as compared to the subject commercial property. This allows you to make a knowledge based guess on valuing the commercial property.

 

3. Income Value approach

Using the income approach , investors can estimate the lease rents a property can be expected to produce. By estimating rents, we then convert those rents into an expected income stream.

This can be used in valuing the commercial property using net operating income calculations and cap rate formulas. See blog on cap rates.