How Do You Predict the Value of Commercial Real Estate?

Aug 11, 2015

Financial value of commercial real estate is measured by profitability moving forward, not what it has been in the past. Predicting the potential moving forward can be difficult. Real Estate Magazine outlines a list of key indicators and opportunities that can build value.

  1. Location – being close to transit or walkable neighbourhoods is key
  2. Revenue, cost and capitalization rate – upcoming vacancies will be costly. It is important to be aware of zoning/developing trends since the surroundings also impact capitalization rates.
  3. Stable tenancies with reliable tenants – go for a property that tenants stay in for a long time. This demonstrates predictability, and the focus can be placed upon re-leasing spaces where the tenants pay lower than market rent.
  4. Strong anchor or shadow anchor that draw significant traffic – Each property needs at least one big market draw that also benefits other tenants, such as a grocery store or a bank. A shadow anchor is a popular destination nearby your commercial property that would also draw traffic.
  5. Current leases below market value with short-term expirations – leases nearing expiry are good if they can be replaced with more stable, higher-paying tenants.
  6. Retrofits that drive rent up – upgrading a property’s appearance can attract better tenants and customers.  Additionally, changing a layout can increase value, such as creating more spaces in a previous single tenant space.
  7. Under-utilized areas that can be developed –  space can be repurposed to include new spots to rent, such as unused parking space.