How to Value Commercial Real Estate

How to Value Commercial Real Estate

Commercial real estate is its own unique branch of property sales. This branch comes with terms and evaluations that can be confusing to some individuals. Many will venture into commercial real estate opportunities as a way to make a long-term investment, a means of seeing how far their money can go based on the generated income of a building. 

One of the best things you can do is work with a real estate company whose business is commercial leasing and sales. At Zinati Realty, this is our specialty. Together, based on our industry insights, let’s take a look at how to value commercial real estate.

Real Estate Appraisal Terms You Should Know

Knowing the lingo of commercial real estate is half the game when it comes to understanding how these properties are valued. Here are some terms you should know in advance:

Gross Rent Multiplier (GRM)

Using an equation, you divide the price of the property by its total income. The lower the number, the better the opportunity. However, the GRM does not factor in expenses, such as maintenance or utilities. 

Net Operating Income (NOI)

This is a calculation that can be used to analyze the profitability of an income-generating property. It measures all revenue after necessary operating costs.

Capitalization Rates

This rate refers to the amount of fiscal return you could get on a property based on projections of its profits. Put simply, it is the rate applied to NOI to determine the present value of a property

How Do You Determine the Value of a Commercial Property?

There are many ways to determine the value of this kind of property. Similar to residential real estate, some commercial buildings can be appraised through the use of sales comparisons, looking at similarities locally like square footage and the year it was built. This method is popular among spaces that are vacant and where the current income adds no value. You might also consider replacement costs, which take into account the construction fees needed to tear the space down and build something new.

One of the most popular means of commercial real estate appraisal is determining capitalization rates. This method of evaluation is ideal for properties that are currently generating substantial revenue. Capitalization rate calculation focuses on enticing the buyer to purchase the space so that they can obtain the income being generated. There are various methods used to determine these rates, but each largely focuses on the NOI and the building’s current value.

Another way to calculate commercial real estate value is with the GRM method. This can be useful when you are considering purchasing a property but aren’t aware of some factors, including its value. It is important to take into consideration other GRMs in the area, which is data that experienced commercial realtors are likely to have on hand. 

Why Does Commercial Property Valuation Matter?

As with any type of real estate, you never want to overpay for a space, especially if it won’t be a worthwhile investment to add to your portfolio. It can be difficult to accurately calculate the value of a property without knowing all the details, but often, you may only have a few facts on which to base your findings. Commercial property valuation uses a variety of calculating methods that can help you come to a sound, well-informed decision.

Purchasing commercial real estate can really be narrowed down to two factors: the market and how much a buyer is willing to pay for it. Working with the full-service commercial real estate team at Zinati Realty can aid you in your decision-making, and we can use our tools to ensure that your evaluation approach matches the situation. 

Interested in learning more about how commercial real estate is valued? Contact us.

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