Calculating value in commercial real estate (CRE) is a very broad concept. There are a number of different value concepts that can be applied to commercial property.
Each type of commercial real estate unit has its own market value, investment value, insurable value, or replacement value. However, when it comes to making a healthy return on investment from commercial real estate market value and investment value are the to main factors to take into account.
Commercial Real Estate Market Value
The market value of a commercial real estate property refers primarily to the value of the actual property in a commercial market. This represents the probable price a property would sell for in an open market.
The market value of a commercial real estate unit is usually determined by a property appraisal. A property appraiser estimates the highest and best use of the specific property. For this, the appraisal takes into account zoning laws and how the property can be used. Then, the financial feasibility is taken into consideration to calculate the highest possible financial return.
Once these factors have been worked out, the appraiser can determine the financial value. Market value is worked out using 3 different approaches.
- Sales comparison approach. This approach compares sales of similar-type properties to determine market value.
- Income capitalization approach. Value is determined based on the income the property can generate.
- Cost approach. The way of calculating market value calculates the cost of building a similar-type property on the available land. However, depreciation is also taken into account with the cost approach method.
Commercial Real Estate Investment value
For most commercial real estate investors, the investment value of a commercial building is the most important factor. The investment value takes into account the actual market value of the property but also the investors long-term investment strategies and tax position.
This means that that the investment value is unique to each individual investor. So, even though the market value will be similar for most properties, the investment value is variable depending on the goals, objectives, and tax incentives.
Market Value vs. Investment Value
In the end, market value and investment value are closely connected. The commercial real estate investment needs to make sense from an investment point of view and also taking into consideration the market value.