How commercial buildings are valued
Commercial property isn't priced like a house. Buyers mostly pay for the income a building produces. Here are the three ways professionals look at value, in plain English.
1. The income approach
Take the building's yearly net operating income (rent minus operating costs like taxes, insurance, repairs and management) and divide it by a cap rate, the return buyers expect for that kind of property. $150,000 of income at a 7% cap rate points to about $2,140,000.
Run your own numbers on our sister site, utahcaprates.com.
2. Comparable sales
What similar buildings nearby actually sold for, adjusted for size, age, condition and location. This matters most for owner-occupied buildings and land.
3. Cost to build
What it would cost to buy the land and build the same thing today, minus wear and age. Most useful for newer or special-purpose buildings.
What moves the number
- Leases: who the tenants are, how long the leases run, and who pays taxes, insurance and repairs.
- Condition: roof, HVAC, parking lot and other big items coming due.
- Location: access, visibility, growth nearby and vacancy in the area.
- Interest rates: when borrowing costs rise, buyers usually expect higher returns.
A broker opinion of value blends these into a likely price range. It is not an appraisal.