Commercial Property Evaluation in a Low Volume Market

Evaluating commercial property is any market is an inexact science and  often a bit more art then an appraiser would like anyone to believe.  The current state of the market makes evaluation even more difficult as there is very little volume and therefore no value precedent to base assumptions upon.

This is something that has to be taken into account as six Essex County municipalities Bloomfield, Cedar Grove, Roseland, Verona, West Caldwell and West Orange prepare for their firs reassessment in 20 years.  See the article from the Star Ledger here.  Not to forget that the City of Newark has proposed funding a reassessment as well.

There are three commonly accepted methods of commercial property evaluation:

  • Cost Approach or Replacement Cost – what is the value to rebuild or actual value of structures
  • Sales Comparison Approach – comparing the subject property to similarly traded properties
  • Income Approach or Income capitalization Approach – estimating the Net Operating Income of a property and converting this to a capital value

Each of these methods has its own peculiarities that make it imperfect.  The cost approach often takes the depreciated value of the asset which if constructed in the past 2-5 years will be very high compared to the decline we have seen in the market.  the sales comparison approach relies on transaction of properties determined to be comparable, however with a dearth of transactions these comparisons are difficult to come by.  The income approach relies on a Capitalization Rate (Cap Rate) which is a highly subjective approach to value and is influenced by a purchasers access to capital and appetite for risk.  The income approach can also utilize a Gross Rent Multiplier which forgoes the expenses and only looks at the revenues of a property, this method is also highly dependent upon the prospective buyers operating efficiency.  Discounted cash flow analysis is also an income approach based upon projected future cash flows of a property and in today’s market very few investors put any confidence into projections.

So if all acceptable means of evaluation are flawed, where does this leave the property owner looking for a solid evaluation?

Exposure to the specific market is the only means of knowing what the market will bear.  When evaluations are so difficult to come by through empirical evaluation methodologies, one must look to exposure to actual market conditions in order to determine the most accurate value of a property.  By concentrating on a specific market and a singular aspect of that market a professional can confidently present an owner with an expectation of value.

Typically appraisers and realtors are generalists covering large geographic regions, all property types and multiple aspects of the real estate industry.  This generalization typically leads to great discrepancies between assess values and the price a property will actually trade in the current market.

At Massey Knakal we are territory specific and only sell commercial properties.  We work diligently to gather as much data as is available on the current conditions of our specific markets.  This market data is shared amongst our 150+ brokers and associates to further increase our market knowledge and exposure.    Although we are typically not certified appraisers, our opinions of value are highly accurate when compared to actual market results.

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2 Comments

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2 responses to “Commercial Property Evaluation in a Low Volume Market

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