The value of a commercial property is an important piece of information in many aspects. Whether you’re the purchaser looking for financing, the seller hoping to attain maximum profit, the appraisal review department at a bank, or an attorney –the value is what provides you with the confidence to make the right decision for your situation. This is why one of our most common questions is “how much is my property really worth?”
As your go to appraisal firm, we get it. We understand that you need to be able to accurately determine if the current estimated value is over, under, or supported by the current market. That’s why we’ve taken the time and answered your question by breaking down and explaining the main factors that determine your property’s value.
A specific real estate market can be studied in terms of geographic, competitive and supply-and-demand characteristics. This article is going to delve into three important drivers of value: location, property quality and condition, and market conditions.
1. Location – A common phrase we all hear when talking about real estate is location, location, location. This is true. The availability of public utilities such as sanitary sewers and municipal or well water affects value in all districts. Real estate tax trends may also impact the desirability of a specific district and may correlate to real estate values. Each property type – e.g., residential districts, commercial districts, industrial districts include certain attributes that affect the value.
As an example, consider the characteristics for a retail district. According to The Appraisal of Real Estate, 15th Edition, published by the Appraisal Institute, a defining characteristic of a retail district is a concentration of competing retail locations, often along a major street. Examples of sub-districts are:
- Regional and super regional shopping centers
- Community shopping centers
- Neighborhood shopping centers
- Specialty centers
- Mixed-use center, e.g. retail and office space
In each of the retail sub-districts, value influences may include:
- Quantity and quality of the purchasing power of the population likely to patronize a shopping area and any trends affecting that purchasing power such as job growth.
- Significant locational considerations such as the time-distance from potential customers, access, highway medians, and traffic signals.
- Physical characteristics such as visibility, quality and condition of construction
- Direction of observable growth
- Character and location of existing or anticipated completion
- Retailers’ inventory, investments, leasehold improvements, and enterprise
- Availability of land for expansion and customer parking
- Pedestrian or vehicular traffic count
- Availability of business financing, e.g., focused redevelopment plans (TIF Districts), minority business support, other public or private programs
- Location within a city or town or proximity to anchors an car groupings
- Availability of labor to work in stores and offices
- Vacancy and rental rates
Of increasing significance is the growth of online shopping. Buying patterns have also changed in the last year. Some areas have seen weakened sales and other have seen strong increases. Location value influences depend on the property type and are an important factor.
2. Property Quality and Condition – A property’s condition can impact the value. A structure can have a functional utility and above average design, but poor workmanship and inferior materials will affect value. Deficiencies such as inferior materials increase annual maintenance and utility costs and adversely affect the property’s marketability. Conversely, properties designed or built with materials that exceed market expectations make it difficult to fully recapture the cost. Most buyers will not pay for these excess costs. Part of the original investment may be recaptured by the original owner through lower maintenance expenses. To help achieve the greatest return on investment, a careful selection of building materials and construction methods must be chosen and used. From an appraisal perspective, the character, quality and appearance of building construction are reflected in each of the three approaches to value.
3. Market Conditions – Changes in market conditions may result from changes in income tax laws, building moratoriums, the availability of financing, employment, interest rates and fluctuations in supply and demand. Sometimes, multiple economic factors work jointly to create varying market conditions. A recent example of this is how Covid has impacted property types differently. Some sectors including single-family, industrial, suburban multi-family and some types of retail have experienced strong growth in demand and increasing property values. Others, such as hotels, multi-tenant office and some retail uses have been negatively impacted due to reduced market demand.
Another example is a meaningful change in interest rates which can affect the ability to obtain financing and can result in changing values (good or bad). Typically, as interest rates decline, more buyers are available and in times of rising interest rates, the market tends to slow down. These factors impact the supply and demand equilibrium.
All in all, knowing and understanding your property’s value allows you to make confident and accurate decisions and gives you greater control over an ever-changing market. As an important member to your investment team, Simonson Appraisals take uncovering the true value of your commercial property seriously.
Looking for a fair and accurate appraisal report for your potential investment property? Feel free to contact us today for your free quote.