Valuing New Office Construction, Cap Rates

[Zack Tomlin]

Hello All,

Does anyone have any guidance on how new spec office construction gets valued. I read a lot about cap rates but have to think that the value is also significantly impacted by the age of it's major systems/components (e.g. elevator, hvac, lighting, etc). Most articles I read would have you thinking that a 2 year old building, and a 15 year old building with the same NOI would have the same value.

Thanks in advance.

[Account Closed]

Zack

R&M are deducted from GSI to get to NOI. The cap rate should be the same for all comparable properties. If the older building actually has more repair and maintenance costs then the NOI will be lower which will then lower the price. A well maintained office building will be as good a property as a new one.

A new spec building will have all market rate rents. The best valuation method is direct sales comparison. If someone is building spec office that means there are probably other new construction. The sales price on those is the comp for your purchase and it is not distorted by cap rate manipulations. Really the ONLY time a cap rate is appropriate is when the NOI's are distorted by having long term above or below market rate leases in place. if the old building had a bunch of above market leases then it would be more valuable that the brand new office leased out at current lower rents.