Commercial Real Estate Valuation Services Explained

Commercial Real Estate Valuation Services Explained - N3 Real Estate

We are adding to our retail-focused commercial real estate comprehensive guides, such as: triple net lease and retail tenant representation with a complete guide to CRE valuation services.

A comprehensive guide to commercial real estate valuation services and appraisals.

It can be very hard to determine an accurate and fair value of commercial real estate, which is why Commercial Real Estate (CRE) appraisers are extremely qualified inspectors, after years of training and experience.

What is a CRE evaluation?

CRE appraisers examine the commercial space itself rather than the entire business.

They will verify all information, including third-party sources, people on-site, and even former property owners, to ensure its accuracy. Appraisers provide independent assessment to offer the least biased assessment possible or they may face disciplinary action from the Uniform Standards of Professional Appraisal Practice.

How is commercial property appraised?

In addition to current market conditions and social trends, a property’s estimated value takes into account a number of key data points, including:

  1. Demand: having a desire for ownership backed by the means to fulfill it.
  2. Utility: meeting the wants and needs of future owners.
  3. Scarcity: the limited number of competing properties available to supply the demand.
  4. Transferability: how easily property rights can be transferred.

To determine the value of a property, a collection of the information and factors influencing these elements is required. This may include some or all of the capitalization rate, rental rate, lease terms, net operating income, TI allowance, and rent escalations.

What is the average cost of a commercial appraisal?

Compared to other types of reports, a Restricted Use Report will only cost the client less and will be shortest. This report may only be used by the client. Restricted reports could cost between $2000 – 2500, depending on the size of the property and the scope of the appraisal.

Summary Reports are the most commonly requested and, as the name suggests, they summarize the data and analysis. They may cost upwards of $3,000 for each intended user.

Self-contained Reports contain everything that is needed to analyse the data. However, they are rarely requested. An appraiser can tell you which report you need depending on what purpose you will be using it for.

How long do commercial appraisals take?

It usually takes three to four weeks to produce a commercial appraisal. It can, however, take much longer than expected. If potential obstacles prevent an appraiser from gathering all the information and documentation required to determine a property’s value accurately, you can expect delays.

Which valuation approach is most common for commercial real estate?

The following three approaches are used to estimate the value of commercial properties:

1) Direct comparison approach

In order to calculate the property’s market value, the appraiser analyzes sales data from recently sold comparable properties in the same market area. It can be difficult to find comparable commercial properties using this approach since no two are identical.

2) Cost approach

Based on this method, the land market value is estimated and the depreciated value of the improvements is added. A unique property, such as the Empire State Building, is a good candidate for this approach.

3) Income approach

Income-generating properties, such as apartment buildings and hotels, are typically appraised using the income approach. The appraisal takes into account the potential of the property to generate income in the future. In order to determine the value, net operating income is divided by the increase in capitalization rate or rate of return projected for the property.

The income approach is the most common for commercial real estate valuation because it is applicable and measurable for most types of commercial real estate.