Commercial real estate may prove to be a valuable source of finance, but the process of figuring out the true value of the property can sometimes prove difficult. The value of an office space, shopping center, warehouse, multi-family property, or mixed-use property will depend greatly on the location, condition, earning capacity, and market of the property.
This is when a commercial real estate appraisal becomes relevant. An appraisal gives an opinion of value based on specific details about the property, market, and other variables that affect the way the property is viewed by buyers and sellers.
Why Commercial Property Value Can Change
Commercial property values are influenced by much more than the physical building. Market conditions, tenant demand, operating performance, and future development opportunities can all affect the property's position in the market.
For example, two office buildings with similar square footage may have significantly different values if one has long-term tenants, lower operating expenses, and better access to major transportation routes.
Factors that commonly influence commercial property value include:
- Location and accessibility
- Property size and physical condition
- Quality and age of improvements
- Current occupancy
- Rental rates and lease terms
- Operating income and expenses
- Recent comparable sales
- Zoning and permitted uses
- Local development activity
- Supply and demand
- Broader economic conditions
A professional appraiser considers these factors together rather than relying on a single data point.
What a Commercial Appraisal Involves
Commercial appraisal is often initiated by determining the purpose and scope of the appraisal assignment.
The purpose of the appraisal itself may dictate the types of information needed to be considered during the process of evaluation.
Depending on the assignment, commercial appraisals can be performed for the purpose of property purchase, financing, refinancing, estates, partnerships, litigation, tax, or some other purpose concerning real estate.
The appraiser studies the data relating to the property being appraised and market information before arriving at an opinion of value.
The report may contain documentation of the entire valuation process.
The Importance of Location
Location remains one of the fundamental considerations in real estate valuation.
For commercial properties, location can affect customer traffic, tenant demand, employee accessibility, transportation costs, visibility, and future development potential.
An appraiser may examine factors such as:
- Proximity to major roads and transportation
- Surrounding businesses and developments
- Population and demographic trends
- Local employment activity
- Visibility and accessibility
- Nearby competing properties
- Neighborhood development patterns
A property located in an established commercial area may have different market characteristics from a similar property in an emerging or declining area.
Income Potential and Property Performance
For many income-producing properties, financial performance is an important part of the valuation process.
An appraiser may review rental income, vacancy, operating expenses, lease terms, and other financial information to understand the property's income-producing potential.
The quality and stability of the income stream can matter as much as the building itself. A property with strong occupancy and favorable leases may be viewed differently from one experiencing high vacancy or declining rents.
This is one reason commercial property valuation requires property-specific analysis. Applying a generic price-per-square-foot figure may overlook important financial and operational differences.
Comparable Sales Provide Market Evidence
Comparable sales are another important source of information.
An appraiser researches transactions involving similar commercial properties and determines whether those sales provide meaningful evidence for the assignment. Differences in location, size, condition, age, income characteristics, and property use may require adjustments or additional analysis.
The goal is not simply to select the most expensive nearby transaction.
Instead, the appraiser considers which comparable properties are sufficiently similar and how their differences affect the comparison.
Current market conditions are also important because commercial real estate markets can change significantly over time.
Physical Condition and Improvements
Physical aspects of the property have a direct impact on its value in the real estate market.
An appraiser may consider various physical factors including age, construction, condition, design, parking, mechanicals, improvements, and more.
The existence of deferred maintenance may influence the perception of the buyer and his future costs. In contrast, good condition of the property or improvements may be responsible for the market appeal.
On the other hand, not all improvements make equal contributions to the value. The contribution is influenced by market demand and buyer’s perception.
Zoning and Highest and Best Use
Land and buildings can have value based on their current use as well as potential alternative uses.
Zoning regulations, development restrictions, permitted uses, site characteristics, and market demand can all influence how a property can be utilized.
For this reason, commercial valuation may consider the property's potential use when appropriate. A site that could support redevelopment may have different market characteristics from a property whose existing use is the most practical option.
Understanding these factors helps provide context for the property's overall market position.
Choosing Among Commercial Appraisal Companies
Property owners and professionals may encounter many commercial appraisal companies when looking for valuation services. Comparing providers based solely on price may not provide enough information to determine whether an appraisal is appropriate for a particular assignment.
Consider factors such as:
- Experience with the relevant property type
- Understanding of the local or applicable market
- Appropriate professional qualifications
- Clear communication about the assignment
- Experience with the intended use
- Ability to analyze complex property characteristics
- Quality and clarity of reporting
The right scope depends on the property and why the valuation is needed. Providing the appraiser with accurate property information and relevant documentation can also support a more efficient process.
Commercial Property Appraisals for Different Needs
Commercial property appraisals can be relevant in a variety of circumstances.
An owner may need an appraisal before selling or refinancing a property. An investor may want independent valuation information during due diligence. An estate representative may require a historical value for an inherited commercial property.
Legal and financial professionals may also use appraisal reports as part of broader documentation.
The purpose should be communicated clearly at the beginning because it helps define the assignment and the information that needs to be considered.
Working With a Specialized Appraisal Provider
Commercial real estate assignments can involve complex properties, detailed financial information, and changing market conditions. Working with an experienced appraisal provider can help ensure the assignment is clearly defined and supported by relevant evidence.
Retroactive Appraisal Group provides professional real estate appraisal services for commercial, estate, probate, inherited property, and historical valuation needs. Its appraisal work can be tailored to the characteristics of the property and the purpose of the assignment.
For properties requiring historical analysis, additional research may be necessary to understand market conditions and comparable transactions that existed during the relevant period.
Making Sense of Commercial Property Value
It is impossible for any one variable to determine the value of all commercial properties. Location, physical attributes, earning capacity, comparable sales, zoning, market conditions, and usage possibilities may combine differently.
An appraisal done by a professional creates a methodical process of evaluation that takes into account all these aspects.
In making decisions about real estate transactions, for property owners, investors, representatives of estates, and other professionals, a knowledge of the creation of value can prove invaluable.
Whether in a present transaction, financing, estate probate, legal proceedings, or historic valuation, market information is an essential element of knowledge about commercial real estate.
Final Thoughts
The value of commercial properties is determined by a variety of physical, financial, and market components. Professional appraisals of commercial real estate assist in determining these components and developing an opinion of value documented in writing as needed.
Instead of just going by the online valuation or average market value, it is wise to consider an appraisal that takes into account the special features of the property and related market data.
In choosing the appraisal provider, it is essential to consider the following factors: experience, nature of the assignment, type of property, and use of the report. A properly specified appraisal could be very useful in making real estate, financial, legal, and estate decisions.
