How Do You Determine Fair Market Value Of Commercial Property?
Before diving into determining a commercial property’s fair market value, we have to define what fair market value is.
Fair market value is the estimated price at which a property or asset would sell for in an open market. It’s not a fixed or absolute number; it can fluctuate based on market conditions, economic factors, and other variables.
Let’s look at how to calculate fair market value and factors that impact the value of a commercial property.
Top Methods of Determining Fair Market Value
Let’s first explore some common commercial real estate valuation models used to determine fair market value. Each valuation model has its pros and cons. The best approach depends on the property and the purpose of your valuation.
Working with a valuation consultant who has commercial real estate experience, like Akrivis, is a great option. They can help you determine the best model to meet your needs.
Cost Approach Valuation Model
This approach calculates the cost to replace or reproduce the property, factoring in depreciation. Expertswill analyze the land value and construction costs (including materials and labor) and then deduct depreciation to determine the property’s value.
Sales Comparison Valuation Model
This method involves analyzing recent sales of similar properties to derive the value of the subject property. Experts identify comparable properties, adjust for differences, and arrive at a professional opinion of fair market value.
Income Capitalization Approach Valuation Model
With this method, the income a commercial property generates is a significant determinant of its value. By estimating potential income and subtracting expenses, investors calculate the net operating income (NOI). Then, the NOI is divided by a capitalization rate to arrive at fair market value.
Factors Influencing the Value of Your Commercial Property
As noted, market value is not fixed or absolute. Let’s look at a few factors that can impact the market value of your commercial property.
Location and accessibility
You’ve probably heard the real estate slogan “location, location, location.” There’s no doubt that location can play a significant role in the overall value of your commercial property.
For example, a prime location in a bustling commercial district or near transportation hubs can elevate value. These areas see increased foot traffic and have good visibility, making them an ideal spot for many commercial ventures.
Also, commercial properties in easily accessible areas such as near a highway or main road, with ample parking, tend to command higher prices. Again, this makes it easier for customers to find and get to these destinations.
Physical characteristics of the property
The property’s design, amenities, and overall upkeep can also cause value to fluctuate.
When it comes to building design, consider factors such as size, layout, age, construction quality, and architectural style. A space that’s small, doesn’t have a great layout, or lacks windows and natural light may have a lower overall market value.
Amenities and special features are also something to keep in mind. Things like energy-efficiency upgrades, security upgrades, or other unique/special features can all cause a property to be valued higher.
And, of course, the more work someone puts into a property to make it usable will impact value. Maintenance and upkeep is vital. A property that is well taken care of will command a higher value than one that requires a lot of attention and repairs.
Income potential and rental rates
Rental rates, occupancy rates, and the property’s ability to generate consistent income directly will also impact its fair market value.
Unlike residential properties, income-generating commercial properties are often leased to businesses or individuals who pay rent for using the space. This rent, in turn, contributes to the property’s income potential.
In short, the more income a property can generate, the more valuable it becomes. Several key factors, such as rental rates, occupancy rates, and consistency of income, influence realized gains.
Market conditions and trends
A property’s value may rise or fall based on prevailing market conditions, making it crucial to consider the broader economic landscape.
Staying attuned to the broader real estate market is crucial. Factors such as overall market trends, supply and demand imbalances, interest rates, and buyer preference will influence property values.
Awareness of whether the market is in a buyer’s or seller’s favor, and the economy’s overall health provides context for determining fair market value.
Think of how the COVID-19 pandemic and precautions changed what many people want from commercial and public spaces. Rather than the open concept idea that was popular for many years, many people now prefer separate spaces to distance or work in smaller groups. More parking and designated areas for curbside pickup, carryout, and to-go orders have also become more desirable.
Review Data & Research
Research and data are key to understanding all these factors noted above and completing one of the common valuation methods.
A comprehensive understanding of a commercial property is fundamental to accurate valuation.
This includes physical attributes such as the size of the property, layout, and design. You’ll also want to assess the overall condition, including the state of the building’s systems, structural integrity, and maintenance history. Physical property details are usually gathered through an interior and/or exterior inspection of the property.
For income-generating properties, rental and lease agreements are also invaluable sources of information. These documents outline the terms of tenancy, rental rates, lease durations, and special conditions. Analyzing lease agreements helps determine the property’s income potential and stability, directly impacting its fair market value.
Market & Local Trends
Beyond the property itself, it’s essential to look at the bigger economic picture to get an accurate value.
Start with comparable property sales data. Comparative analysis is a cornerstone of property valuation. Researching recent sales of similar properties in the local area provides a benchmark and helps identify pricing trends.
Also, review local economic indicators, such as employment rates, population growth, and GDP trends. A thriving local economy often translates to increased demand for commercial properties. Conversely, economic downturns or shifts can lead to decreased demand and lower valuations.
Work With Property Valuation Professionals
If you’re wondering how to calculate the value of commercial property, it’s best to work with an expert. Appraisers and valuation experts play a vital role in determining fair market value. Choosing the right professional with a strong track record and understanding of the local market is essential.
The experts at Akrivis are trained to collect accurate data and then interpret reports for you. We stay current on the market, economic conditions, and trends, so you don’t have to.