Evaluating Vacant Commercial Property Value

Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes

So I understand cap rates, NOI, and how they both affect the value of a commercial property. For example, a building at 50% occupancy would significantly raise the NOI and thus value of a property. My question however is, how does one evaluate the value of a property if it has been vacant for an entire year and essentially has a negative NOI? I'm assuming you can't really utilize current NOI, so would one go off a combination of comps, percentage of previous NOI and value of the land? Thanks!

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Edward B.

Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes

@Bill Goodland, property is valued using three different approaches; the Sales Comparison Approach, the Income Capitalization Approach, and the Cost Depreciation Approach. When an appraiser appraises the property, they will do all three and weight them accordingly based on the type of property and strength of the data. Typically, commercial property is valued with the most weight going to the income capitalization approach because that is primarily how those properties are bought and sold. So, you can estimate what you believe are accurate income and expenses for the property or you can utilize one of the other approaches if the data is stronger.

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Priyanshu AdathakkarPro Member
Realtor · Columbus, OH · Member since 2017 · 313 posts · 245 votes
9y
Location, location, location plus current zoning, availabilty of comparable land in a 5 mile radius, availability of utilities (on site or nearby), is it a pad site or raw land or demolition and prep is needed etc will determine the asking price which could be entirely arbitrary. I have a piece of redevelopment land in contract @$600,000/acer compared to $200,000/acre comps (previous sales) in the area.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
9y
NOI is defined as all revenue from the property minus all expenses. 100% occupancy will create a higher NOI than 50% occupancy every time unless you are paying the tenant to stay there.
When evaluating a commercial property you should try to get 2-3 years worth of financials. Since it's been empty for a year, I would try to get the last 2-3 years it was occupied. But that only tells you how it performed then. You need to consider how it is performing now, which is a negative NOI.
Why is it sitting vacant? What is the potential for getting it rented? Is there another way to use the facility to generate income and increase NOI?
I don't know if you are asking this because you have a property in mind or are just trying to tget an education. I hope you are working on the education piece because you there is a lot to learn.
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Bill Goodland
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Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
9y
Originally posted by @Nathan Gesner:

NOI is defined as all revenue from the property minus all expenses. 100% occupancy will create a higher NOI than 50% occupancy every time unless you are paying the tenant to stay there.
When evaluating a commercial property you should try to get 2-3 years worth of financials. Since it's been empty for a year, I would try to get the last 2-3 years it was occupied. But that only tells you how it performed then. You need to consider how it is performing now, which is a negative NOI.
Why is it sitting vacant? What is the potential for getting it rented? Is there another way to use the facility to generate income and increase NOI?
I don't know if you are asking this because you have a property in mind or are just trying to tget an education. I hope you are working on the education piece because you there is a lot to learn.
Thanks, I don't have a property locked up by any means. I have a lot of interest in commercial down the road due to the potential for forced appreciation. I finished a book on commercial REI recently which talked a lot about value add deals, but was curious about the initial value when a property is vacant so for right now this is just for education.
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Edward B.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
9y
@Bill Goodland, property is valued using three different approaches; the Sales Comparison Approach, the Income Capitalization Approach, and the Cost Depreciation Approach. When an appraiser appraises the property, they will do all three and weight them accordingly based on the type of property and strength of the data. Typically, commercial property is valued with the most weight going to the income capitalization approach because that is primarily how those properties are bought and sold. So, you can estimate what you believe are accurate income and expenses for the property or you can utilize one of the other approaches if the data is stronger.
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Greg Baker
Colorado Springs, CO · Member since 2016 · 3 posts · 6 votes
9y
Like @Edward B. said, you have to look at what "market participants" do when valuing each property. A Sales Comparison or Income Capitalization approach is most likely for existing buildings. How you get the value for the vacant building is a little tricky, but similar to @Nathan Gesner explanation.
Two methodologies to look at it:
1. An appraiser would first determine the As Stabilized value (use the Sales or Income to determine the final value and calculate NOI and market cap rate, assuming market rent, vacancy allowance and expenses).
Then calculate As Is value by deducting lease up costs (repair deferred maintenance, lost rent, leasing commissions, tenant improvements) and profit to complete the project. The lease up costs are going to be a best guess by surveying local brokers and property managers for lease up time. Profit needs to be sufficient for an investor to take on the risk of the project. This is typically added as a percentage of the total lease up cost 15%+ not total project. Another way to calculate profit is to increase the cap rate to account for more risk.
2. Comp a non-stabilized property with other non-stable properties that sold. This is not as likely because there are typically fewer sales out there and it is not as reliable as the first method described.
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Derek Shearin
Chapel Hill, NC · Member since 2017 · 2 posts · 0 votes
9y
I have pondered this question as well. Would another method be to calculate the land cost+build cost-repairs and deferred maintenance?
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