How Commercial Property Influences Market Value

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How Commercial Property Influences Market Value
How Commercial Property Influences Market Value

There are several types of value related to commercial real estate, with the term, market value, generally referred to in the context of the value of a property related to a loan. A property is capable of having various types of value at any given time; therefore, it is an important factor to keep in mind when assessing market and investment values.

The market value is determined by an appraisal of the property and during a commercial loan underwriting process, the majority of lending sources will require an independent, third party appraisal. This figure will then be the basis for an appropriate loan sum and a collateral value. It is in comparison to the investment value of the property, which relates to the value generated by the needs of a specific investor, the financing factor and tax rate

We are then confronted with insurable value and assessed value; with the former used to determine the value of certain segments of the property, having the potential to be destroyed and which are required for the purposes of insurance coverage. The assessed value is the property worth, as determined by a local tax assessor for the purpose of real estate taxes.

Two other types of value remain; liquidation and replacement values. The liquidation value is the established probable price for which a property would be sold as the result of a forced sale; for example, tax sale or a foreclosure. It is utilized in the event of limited opportunity for market exposure, or in the case of other restrictive conditions regarding the sale. The term, replacement value is used in the event of a structure needing to be replaced with one that is identical, or offers the same facilities.

The market value of a property is estimated by appraisers, but prior to this, it must first be determined, what are the most financially valuable, advantageous and beneficial uses of the property?  This process usually commences with the evaluation of the zoning laws, to gain awareness of the legally permissible uses for the property.

Market values and the investor

Although the procedure related to determining market value is generally confined to appraisals for underwriting a loan, it also applies to its worth when being considered for investment purposes. The investment value is the sum an investor is prepared to pay for a particular property that meets determined objectives including the tax situation and desired financial yield.

The investment value is unique, due to it depending on the objectives of an investor; accordingly, each investor, although using similar methods of valuation, could all arrive at differing investment values. An investor has a varied selection of valuation methods available, unlike an appraiser who is bound by strict procedural guidelines.

  • For an investor in commercial properties, the Gross Rent Multiplier (GRM) is a ratio that determines the investment value of properties within similar market segments. The value is achieved with multiplication by the market-based Gross Rent Multiplier (GRM), of the gross rents produced by a property in a 12 months period.
  • The cash on return principle is a ratio designed to determine investment value. With this method, the value is calculated by assessing the pro-forma cash flow for the first year, before tax and then dividing it by the total initial investment.
  • The process of direct capitalization is used by appraisers. It is a popular and easy method of capitalizing the income stream of a property and determines the market, as well as the investment value, of a commercial property.
  • A method known as discounted cash flow is utilized to discover; an internal rate of return, the present net value, a capital accumulation comparison.

Although the easy-to-use foregoing ratios above are convenient methods, they do contain various inherent limitations, which can be corrected by using a discounted cash flow analysis.

Influences on Commercial segments

Branding and the promotion of commercial brands are becoming more crucial in the highly competitive marketplace and it is natural that greater emphasis on “brand pride” is being directed to the places of work. Accordingly, designs for work areas, whether involving occupiers or tenant, are becoming more creative in their designs, with organizations; such as, Google and Facebook well advanced in the process. This particular aspect of brand awareness will also be an attraction to new talented employees, as well as adding value to the offices and factories concerned.

Property development is critical to any commercial marketplace and whilst there is financial capital available, to enter the commercial real estate market, finding the right vehicle is proving a challenge in certain instances. Therefore, it is a probability that new developments will take place, but with the intention of taking a calculated risk regarding the leasing aspect. However, this development could be confined to noteworthy transit centers, to cater for the critical factor of employees’ access to their workplace. A further likelihood is the planning of more multi-faceted developments, designed to meet the combined needs of work-live-play!

Investors generally, are continuously searching for worthwhile opportunities, which are going to be exasperated in the United States particularly, by ongoing pressure from new entrant investors, such as those from Asia, Europe. In addition, Canadian entities that have yet to explore commercial real estate, for their portfolios. It could be regarded as a commercial traffic jam, with greater capital available than good investment opportunities to buy?

It is generally gratifying that the recovery process in America now appears to have established a firm foothold. Industrial and the suburban office markets, which were significantly affected by the slow USA economic expansion, should now be in a position to take advantage of the new and positive growth conditions in the commercial arena. Investment in real estate does in general continue to maintain a robust coverage over risk-free returns, with positive leverage still available at current debt rate levels.  

However, how the investment market determines value in the real estate market in the prevailing environment, will be a key factor in any ripple affect, for commercial property owners! If you are interested in investing in commercial property and are looking for commercial properties for sale in Australia then visit our search section to find numerous commercial properties available in your local suburbs

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