Commercial real estate has long been considered to be one of the most stable investments available. This is largely due to the fact that it is not as susceptible to the roller coaster highs and lows of the residential real estate bubbles. Likewise, the return is usually higher due to the fact that most commercial tenants have triple net leases, that and there is often less turn-over with commercial tenants because relocation for a business is very difficult and fraught with risk.
Many factors must be considered when pricing a commercial property, whether for sale or lease, and that is why many owners and buyers wisely consult CRE brokers to help determine the value of investment properties. A broker who is dedicated exclusively to CRE, spends every day considering and representing commercial property, therefore, he or she will be able to make educated, knowledgeable recommendations on pricing.
Often, a CRE agent is faced with the unfortunate task of informing owners that their property will not bring as much as they had hoped and may opt to pass on taking the listing, choosing to focus their marketing resources on properties which are reasonably priced and far more likely to sell. Or, if the amount needed to pay off a mortgage exceeds the value of the property, the agent may choose to protect the relationship and not take the listing, knowing the owner will be disappointed in the end.
Owners and buyers alike should ask their broker for documentation in the form of both recently sold comps as well as similar listings, to validate their recommendation of a price. Most brokers welcome this request as they then know they are dealing with fully informed sellers and buyers.
1. The building’s features must be taken into consideration: age & size of building, size of lot, overall condition, code compliance, presentation, location, upgrade features, state of repair, highway access, road frontage, curb appeal, signage, electrical supply, loading access, ceiling height, available parking, fire/sprinklers, truck turning radius, etc.
The phrase “location, location, location”, though a little over-used, remains a standard in the real estate industry, and especially so with CRE. A shoddy corner lot in the heart of a retail strip is considered prime real estate while an off-the-track parcel, beautiful though it may be, is not. Location is a major player in the pricing game.
While the age of the building is definately a consideration, the age (and condition) of the major components within, or attached to, the building, is probably of equal concern to a potential buyer, or even a prospective tenant, who may be taking on the responsibility for maintenance and repair issues. Roof, HVAC, interior and exterior plumbing, electrical and parking lot are some examples of major components to take into consideration. Looking only at the positive features of a property can give a false value, so close attention must be given to the negative aspects as well. Some features, or lack thereof, can devalue a commercial property such as a warehouse with limited ceiling height, an office building with more square footage than the parking lot can accommodate or a retail center with little to no visibility.
2. Recent sales (comps) of properties that closely mirror the features of the subject property must be closely examined. The agent should take note of both negaitve and positive features and how they compare to the subject property and apply an estimated value. In a sense, the agent will use very similar tools that an appraiser uses, however, an agent is not a hired appraiser, and their opinion is just that - an opinion...although an educated one. The only way to guarantee a true value is to hire a licensed CRE appraiser which can be very costly.
A careful look at recent comps is one of the best resources available as it shows what buyers are willing to pay. However, one must also look at who the buyers were. For example, Walgreens may pay twice (or more) the market value for a corner location just to be across from CVS. This comp cannot be used for a like property which may not be in the rifle sights of a national chain buyer.
3. Listed properties which would compete with the subject property must be considered. After all, if there are 3 similar office buildings in a complex each listed for $100,000 and yours comes in at $189,000 it’s pretty much guaranteed, unless there are remarkable upgrades that a particular buyer can benefit from (and is willing to pay for), potential buyers are not going to be ringing the phone off the hook asking to look at yours. Speaking of upgrades, it must be pointed out that even the most expensive upgrades may be utterly useless to the future buyer/tenant. In fact, those expensive upgrades may in fact be considered a draw back in the form of added expense for a new buyer to have removed.
4. Determining demand is vital. Looking at how long the above mentioned comps have been, or were, on the market, determining how many similar properties are currently listed, and inquiring among local real estate circles can all give the broker a real feel for how much demand there is for the subject property.
5. A bit of broker magic must factor in. No, I’m not talking about a magic wand the broker can wave elaborately and, poof, you get your dream buyer willing to pay 40% more than market value! I’m talking about the magic that comes from agent working day after day after day in a dedicated CRE market and, consequently, having a feel for whether that market is trending up or down.
6. Adding a little bit of wiggle room to the pricing recommendation is, of necessity, the final step to assure offers come in at a price that the buyer/tenant or the seller is looking for.