how-commercial-real-estate-is-valued

How Commercial Real Estate is Valued

How much is the commercial property you’re investing in actually worth, and how is that number calculated?

How Commercial Real Estate is Valued

How much is the commercial property you’re investing in actually worth, and how is that number calculated?

When investing in commercial real estate, most people primarily focus on the potential ROI. However, it’s important to understand the factors that a sponsor considers when calculating that number.

In particular, you should always take a closer look at the property’s valuation, because the process for determining the value of commercial real estate is not entirely objective. There are many factors that impact a property’s value, and different factors will be prioritized depending on the valuation method a sponsor uses.

Common Methods for Property Valuation

For the purpose of this article, we’ll look at three of the most common approaches people use to determine the value of commercial properties, and the pros and cons associated with each.

The cost approach estimates how much it would cost to replace the existing property, factoring in the value of the land and the amount it would cost to build the structure from the ground up in today’s economy.

Other approaches focus heavily on capitalization rates, or the expected rate of return on a real estate investment. To calculate a property’s cap rate, you simply divide the expected annual net operating income by the property’s current value. If a cap rate is particularly high, that may indicate that the property is undervalued. In general, cap rates are most useful when dealing with stable assets that have a predictable net operating income over time.

As its name suggests, the sales comparison approach focuses on looking at the value and performance of similar assets in the same market. Factors considered may include price per square foot, price per unit, operating income, and tenant profiles.

Each of these approaches can serve as a helpful data point as you’re conducting due diligence, but it’s important to also understand their limitations.

The cost approach does not factor in the property’s potential to generate long-term cash flow in the future. The effectiveness of sales comparisons almost entirely depends on whether recent comparables even exist in the local market. And cap rates, while useful for understanding an investment’s risk level and projected returns, do not account for inflation or leverage.

Because of this, it’s important to not rely too heavily on any one approach, but rather look holistically at the property’s current value, potential for cash flow and appreciation, and expected performance in a variety of market conditions.

Our Strategy at Excelsior Capital

At Excelsior Capital, we’ve chosen to focus on commercial assets in secondary markets with strong underlying economic fundamentals. These assets are often undervalued and overlooked by larger institutional groups. Additional factors that are important to evaluate are:

We also prioritize asset classes that are durable through periods of recession and have uncorrelated cash flow and upside. This sets us apart from some other investment sponsors who prioritize higher returns but do so by investing in more volatile asset classes.

Remember: just because a deal has a higher-than-average projected ROI does not necessarily mean that it’s a better investment than another deal that has a lower ROI but is located in a strong market or is part of a more stable asset class.

Partner with an Experienced Sponsor

While it’s always important to conduct due diligence before making an investment, working with a sponsor you know you can trust will help eliminate some of the question marks around a property’s valuation and the returns it’s expected to generate.

This is one of the key benefits of co-investing in commercial real estate with a company like Excelsior Capital. We do all the heavy lifting of sourcing deals and then presenting them to our prospective investors. And after a deal is completed, investors can count on us to handle all reporting, property management, and investor relations, while providing you with full transparency through our investor portal.

If you’re interested in learning more about our direct investment opportunities, please fill out this form to get in touch with our team.

Previous Articles

the-ultimate-guide-to-commercial-real-estate-investing

The Ultimate Guide to Commercial Real Estate Investing

Learn everything you need to know to assess the benefits of a commercial real estate investment and make the best decisions to get started.

how-much-money-do-I-need-to-start-investing-in-commercial-real-estate

How Much Money Do I Need to Start Investing in Commercial Real Estate?

We frequently have conversations where people tell us, “I want to start investing in commercial real estate, but I’m not sure if I have the capital.”

benefits-of-owning-commercial-property-over-residential

Benefits of Owning Commercial Property over Residential

While both types of real estate investments have their benefits, investing in CRE can be more advantageous for several reasons.

The Revolution That Wasn’t

How has technology impacted modern finance and created an asymmetrical relationship between Wall Street and individual investors? In this episode, we speak with Spencer Jakab, the author of The Revolution That Wasn’t and editor of the Wall Street Journal’s Heard on the Street column.

Tax Savings Secrets: How Cost Segregation Analysis Can Save You Money

How can cost segregation analysis help real estate investors maximize their returns? In this episode, John Hanning explores the potential benefits of cost recovery studies and depreciation.

What is a Family Owner’s Manual and Do I Need One?

It’s time to make sure you and your family are set up to continue success for generations to come. Today, Josh Kanter shares his journey transitioning from practice as a transactional attorney to reorganizing his family’s activities under a single-family office.

Key Characteristics of High-Performing Family Offices

Are family offices becoming more popular? In this episode, Robert Daugherty dives into the importance of having a functional family office, and the role of the Chief Learning Officer in it.

Talking to Your Parents about Their Finances

As your parents age, you may find that you want or need to broach the often-difficult subject of finances. In this episode, Cameron Huddleston, an award-winning personal finance journalist, discusses how to have meaningful conversations with your parents about their finances.

Pros, Cons, and Features of Robo-Advisors for the Wealthy

Learn how to amass wealth – the right way, for you. In this episode, Barbara Friedberg, a former portfolio manager and university investments and finance instructor, delves into how robo-advisors have revolutionized traditional financial advisory services.

Excelsior Capital

A real estate private equity firm that owns and operates high quality multi-tenant office assets in emerging secondary markets.

Interested in learning more about Excelsior's investment opportunities?

Excelsior Capital

104 Woodmont Blvd, Suite 120
Nashville, TN 37205

investors@excelsiorgp.com

w

Livechat

Disclaimer: Under no circumstances should any information presented on this website be construed as an offer to sell, or solicitation of an offer to purchase any securities or other investments. This website does not contain the information that an investor should consider or evaluate to make a potential investment. Other materials related to investments in entities managed by Excelsior Capital are not available to the general public.