Commercial Real Estate

Commercial real estate is only used for business purposes. This includes an office, industrial, or retail property that can be bought or sold in a real estate market. Examples include gas stations, convenience stores, and strip malls. Differentiating itself from residential property, commercial real estate earns income for its owner. Valuation methods for a respective property are typically based on current and/or future income streams minus expenses. One exception to this is raw land.

The income method of appraisal or valuation is most commonly used when dealing with properties that generate income from rents or leases. Appraisers may use a capitalizaion rate (cap rate) and a net operating income to estimate commercial value. There is an inverse relationship between value and cap rate. For example, as the value of a property rises, the cap rate decreases. An appraiser may also use the gross rent multiplier (GRM) to value commercial real estate. This method uses the gross rentals of a property instead of the net operating income.

In addition to the capitalization and gross rent multiplier methods, the condition of a commercial property is considered. Large repair expenses must be considered in arriving at an estimate of value.

The income method of appraisal or valuation is most commonly used when dealing with properties that generate income from rents or leases. Appraisers may use a capitalization rate (cap rate) and a net operating income to estimate commercial value. There is an inverse relationship between value and cap rate. For example, as the value of a property rises, the cap rate decreases. An appraiser may also use the gross rent multiplier (GRM) to value commercial real estate. This method uses the gross rentals of a property instead of the net operating income.

In addition to the capitalization and gross rent multiplier methods, the condition of a commercial property is considered. Large repair expenses must be considered in arriving at an estimate of value.

Commercial Real Estate Risks

Catastrophic events such as earthquakes, tornados, and hurricanes have damaged or destroyed numerous commercial properties. Engineers are continually monitoring how structures respond to these types of events in hopes of improving overall building quality.

Also, for rental commercial property, it is important for a respective owner to be aware of the types of operations being conducted by current tenants. For example, a mechanic working out of a garage may be generating pollution hazards due to paint spraying activities. Also, the same individual might be spilling oil from a "tune up" on the driveway.

The commercial real estate is market is and financing has changed since the turn of the new century. A favorable interest rate environment and significant property appreciation have helped in the rise of commercial real investing.

Key Terms

Appraiser Process Explained - Certified and Licensed Appraiser - Learn how the appraiser process is performed. A licensed real estate appraiser uses his or her knowledge of the real estate market to derive at property value.

Real Estate Appraiser Jobs - Trainee and Experienced Appraisers - How do you become a property appraiser? Click here for further information.