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.

Additional Key Terms Include

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 Appraisal - Explanation on the Inspection and Report - Read how a real estate appraisal is used to develop an opinion of value.

Real Estate Agent - Realtor Guidelines and Ethical Behavior - Explanation on real estate agents and how they must acquire a real estate license to represent a buyer or a seller in a real estate transaction.

Real Estate Investing - Information on Foreclosures- Explanation on real estate investing and the purchase of real estate for profit.

Commercial Real Estate and The Real Estate Market - Learn more about commercial real estate and how it can be bought or sold in the real estate market.

Real Estate Development - Modern Architecture and Structure - What is real estate development. Learn how developers are usually in the form of a company such as a corporation, but can also be an individual or partnership.

Real estate law - Including The Real Estate Contract - Read up on how real estate laws vary significantly between jurisdictions.

Real Estate License - Appraiser, Realtor, and Mortgage Broker - Explanation on mortgage broker, real estate agent, and appraiser licenses and how they must be updated with continuing education.

Real Estate Market - Updates on the Condition of the Market - How do the real estate agent, property appraiser, and mortgage broker affect the market.

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