Understanding the value of commercial real estate is the key to making educated business decisions in the CRE marketplace. You may be shopping the market for a commercial plaza, industrial asset or maybe a multi-tenant property - so what would make this CRE a good buying or investment decision?
The North American commercial real estate market is tight, but that is not to say that we are not on the verge of a surge. Our biggest challenge in 2022 is trying to convert non-functional CRE spaces into high-quality multi-level properties that are profitable.
While times have been unprecedented, commercial real estate has become more resilient and can be a positive addition to your portfolio if you choose to invest. Consider co-investing with a sponsor to create passive income and increase wealth over time if you are just starting out. A seasoned partner can bring in their expertise on how to operate, manage and improve the commercial real estate you are contemplating investing in.
Before looking at the value of a CRE, we will start by researching properties with value-add potential, valuation below or at market value, specifically those that are located in growing neighbourhoods with an improving business climate.
One of the main questions we may be asking ourselves is, “What is this property worth?” or “What valuation methods can I employ for CRE?”. In residential real estate, you can look at similar listings around the area. This method, also known as “comps” or comparables, is employed to determine the perceived value of a property by comparing it with similar properties on the market in proximity. With commercial real estate, the value is determined by the income of the property and what it will generate in the future.
Venture for your success with a clear understanding of a commercial property’s actual worth. Whether you’re looking at investing in certain commercial real estate like retail, industrial, office or multi-tenant property complexes, you’ll need to do your thorough research before committing.
How do you calculate the potential revenue of a commercial real estate property?
There are several different factors you should consider when evaluating a commercial property - from assessing the numbers on paper to tangible objectives of what you want the physical property to become to how much work you’ll need to make it come to fruition, you need to have a clear idea before you jump into any buying or investing negotiations. It is always a good idea to employ or partner with those who have the knowledge and experience to avoid first-time investor and buyer learning mistakes.
Whether you’re getting into commercial real estate to satisfy business objectives, thrive on a good challenge, trying to diversify your portfolio or have simply been considering investing in CRE for years, always do your research. There are a lot of things to take into account, but if you invest in CRE with fantastic potential, you can build your wealth more quickly and efficiently than if you keep your cash on the sidelines.
There’s more to commercial real estate than just crunching the numbers. Estimating the potential revenue of commercial real estate is using the market cap rate percentage against the CRE market value for the current market price. For example, when the market value of the property increases due to expected demand (e.g. healthcare services, shopping, dining, office space) or information about zone changes and development plans.
We also need to take into consideration the fact that we are upgrading the CRE and therefore adding value as well as the expected development in proximity adding to that value. We want to see this investment growing because of expected market conditions/demand to double or triple the value in the long run while producing revenue.
There may have been a different reason for you to consider making an investment in CRE. For example, the value of the land on which a property exists, factoring in the costs of potentially building the exact reproduction of the current building and adding that number onto the land value. From there, the depreciated value is considered and the actual property value is adjusted accordingly.
You might have also heard of the ‘Comparable Approach’ (the Market Value Approach) valuation method, and I would say in my experience, it’s the easiest way to determine the value of a CRE property. The Market Value Approach compares the property in question to other comparable ones in reference to its use and size, which have been sold or placed on the market within the surrounding area.
A range of value is determined from the market research, and an estimate is created based on the physical characteristics of the property being valued. The number is going to be determined by what the purchaser is willing to pay in a competitive market at any given time. Also, determining their range of negotiations can be financially advantageous to you in the end.
ReDev’s philosophy is supported by its disciplined due diligence process, with a focus on preserving capital and unlocking value in real estate properties. We pride ourselves on diving deeply into projects to identify the value that others may overlook.