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Home » Property Management » What Is Commercial Property Valuation and Why Is It Important?

Real estate investors need to determine the value of a piece of property for a variety of reasons. However, one of the main reasons why commercial property valuation is so vital is that it allows investors to establish how much a particular property is worth. By doing this, they’re able to make sound business decisions and make sure they don’t spend an obscene amount of money on one lot. Similarly, it lets sellers price their properties competitively.

It’s worth mentioning that the value of a piece of real estate depends on a number of factors, including the condition of the property, the demand for the property type, the location, how much money the property may generate, and so on. The value can also be dependent on the seller’s perceived value of the property (for instance, if they see the property’s potential to be profitable, this can boost its value). However, certain factors may also cause it to lower in value, from an investor’s point of view. For instance, restrictions on how commercial properties can be used may lower the property’s value from the buyer’s perspective.

With that said, you and the current owner of a particular property may not see eye-to-eye when it comes to how much its value really is. To you, it may be worth less, but to them, it may be worth more.

Why Might You Need a Commercial Property Valuation as an Investor?

As an investor, it’s understandable that you wouldn’t want to spend more money than what’s needed to obtain a property. When investing in commercial property such as a shopping mall, you can partner with an appraiser or property management company to verify if the price stated by the seller is reasonable. Or, if you’re getting a mortgage, you may be required to conduct a commercial property valuation for mortgage purposes, as your lender may want to confirm if the amount you’re borrowing is correct.

If you plan to sell your investment property, the commercial property valuation can give you insight into how much your prospective buyers will probably be willing to pay.

Who Conducts a Commercial Property Valuation?

Real estate agents can conduct a commercial real estate valuation, as they’ve been in the business for a long time, making them well-versed when it comes to the commercial market. But sellers should be cautious, as some brokers are prone to increasing the value in order to secure more commission. You can also partner with a professional or board-certified appraiser if you plan to buy a property.

Plus, if you’ve partnered with a commercial property management firm, they may be able to calculate the office building, shopping mall, or multi-unit building’s value on your behalf.

What Factors Affect the Value of a Commercial Property?

Below, we’ve broken down a few of the factors that may affect the value of a commercial real estate investment:

#1 The Economy

The Economy

Economic conditions such as inflation rate, employment, gross domestic product (GDP), etc. are some of the most critical factors to consider when calculating the value of commercial investments. It’s a fact of life that the economy is sometimes better for buyers than it is for sellers. The problem is that these conditions are beyond your control, so it may be worthwhile to wait to sell or buy at a later date. It would also be wise to consult a property management or real estate agent to guide you in understanding the current economy.

#2 The Location

Arguably one of the most important variables that may impact a particular commercial property’s value is its location. Neighborhood-specific factors such as closeness to transportation, traffic count, crime rate, etc. can increase or decrease the amount of money that potential purchasers will be willing to pay. Properties that are on the corner of intersections tend to be more valuable, as more people are likely to visit them. As a buyer, you should be prepared to pay a premium for these types of properties, as the seller will probably bump up the value due to these variables.

#3 The Property’s Condition

Commercial properties with leaking roofs, peeling paint, and broken HVAC systems will make potential buyers want to pay a lot less. Even if you believe your property has the potential to be profitable, they may not be prepared to do the work to make it “rent-ready”. In most cases, they’d rather not bother buying the property, as the repairs will cost them too much time and money. That said, if you plan to sell your property, you may want to enlist the help of professionals. Poor do-it-yourself (DIY) repairs will be apparent and may put off potential purchasers.

Similarly, as a seller, you will need to weigh whether or not the cost to repair the property will be worth it. Older buildings may be cheaper, but they tend to come with more problems, such as out-of-date construction and lead-based paint. A professional property management company can help you calculate the exact return on investment (ROI) of cheap “fixer-uppers”.

#4 The Property’s Potential

The Property’s Potential

Commercial real estate’s potential can also have a substantial impact on its value. That’s because a property’s current condition can be changed – it may even be very different from what it is today. For example, a warehouse may be converted into a shopping center if it’s in a location where residential properties are expected to rise.

#5 The Property’s Ability to Meet Tenant Demand

A commercial property that cannot meet market demand may become obsolete and thus less valuable to investors. For instance, an office building that does not offer sufficient space and amenities for modern-day tenants may see its value decline.

The Takeaway

These are only some of the factors that may influence the value of a commercial real estate investment. As an investor, it should be non-negotiable to partner with an appraiser or real estate professional to calculate the value of a prospective commercial space. This will allow you to make sure you don’t spend too much, or that you don’t sell your space for too little.

Luxury Property Care can advise you as to what investments are worthwhile, and help you accurately calculate how much prospective properties are worth. And as a full-service property management firm, we’re also here to help you run your commercial space to secure its success.

For more information, call (561) 944 – 2992. You can also complete our contact form to request a quote for our commercial property management services.

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