Commercial Real Estate Valuation 2

The approaches used to value commercial real estate from an appraisal perspective determines the possible sale price a property would yield on the open market with adequate time for marketing by a knowledgeable seller who is not under duress, fully informed of market conditions and a knowledgeable buyer agreeable to consummate the purchase also without undue duress to act. The range of values derived from the methodologies used and the final conclusion after implementing adjustments for different variables represents processes used to determine the market value of subject property under specific conditions and at a specific time. Changes in the variables e.g. vacancy factor, comparable sales, depreciation for economic or functional obsolescence, etc invariable alters the values derived from the processes and the obtained conclusion. The three methods used for finding a range of property values from which the final conclusive worth is attained are the: - Income Approach, Cost Approach and Comparable Sales Approach.

Income Approach - establishes the value of real estate as a derivative of its net operating income in relationship to the prevailing capitalization rate associated with the asset class in its submarket. The Net Operating Income (NOI) representing the amount after gross income drilled down through effective income added miscellaneous income, etc minus expenses associated with operating the property. The value calculated from this approach is deemed more indicative of the true worth of the property by some practitioners in comparison to the other two approaches below from an investment perspective. 

Cost Approach - establishes the value of real estate calculating the current worth to recreate improvements at cost minus depreciation for functional and economical obsolescence; the underlying land is not depreciable. Technological advancements, procedural changes, more adaptable efficient materials, user friendly space layout plus industry changes and the desires of the end user, etc can diminish the appeal of once highly sought buildings or leasable space in relation to newer inventory. This results in a lesser market value being assigned to the property factoring its reduced appeal to a broad base market. 

Comparable Sales Approach - establishes the value of real estate from the historic sales of similar properties in the submarket with adjustments for dissimilar characteristics with these properties; assigning values for these features or lack thereof and adding or subtracting dollar amounts reflective of the increase or decrease in value attributed. This process draws its data from the sales activity in the market place and the historical purchases/sales of properties of the same CRE type, e.g. multifamily, retail, industrial, etc that have sold under arms' length transactions including financing structure which does not suppress the sale price. 

The collective information obtained from each approach is analyzed with weight given to respective methods depending on the nature of the subject property, the quality of the data available for the approach and the purpose of assigning value.

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