What Is A Commercial Real Estate Appraisal?

February 15, 2022

The commercial real estate market in the U.S. is worth an estimated $1 trillion. It’s known as one of the most lucrative industries for a reason, but it’s also notoriously difficult to break into for a reason. Whether you’re a new investor or a lifelong pro, you probably know just how important an appraisal is in determining success. Indeed, a commercial real estate appraisal can be a make-or-break factor for your profitability. Despite its importance, the commercial real estate appraisal process remains somewhat mysterious to many business owners. What does an appraisal entail? What parts of a property are assessed? How does this assessment inform the appraised value? Find out the answers to these questions — and everything else you need to know about commercial appraisals.

What Is a Commercial Real Estate Appraisal?

A commercial real estate appraisal is exactly what it sounds like — an appraisal to determine the estimated value of a commercial property. This type of assessment is often a prerequisite for the sale or purchase of a property or may be used for financing purposes. It should represent the unbiased opinion of the appraiser, and the appraiser should be licensed in their field of appraisal. The assessment itself will typically entail extensive analysis of the property through physical inspection combined with research about the surrounding market and its values. After taking these criteria into consideration, a monetary value will be assigned to the property, signifying its commercial worth.

How Is a CRE Appraisal Different from a Residential Appraisal?

Residential and commercial real estate appraisals follow the same general protocol — an appraiser evaluates the value of a property and assigns a monetary value based on a variety of factors. There are a few key differences between the appraisal of a home and the appraisal of a commercial property. The biggest difference is the way that each type of property’s value is calculated. While an appraisal of commercial and residential properties may include a flat figure for its value, a commercial real estate will feature another type of valuation — a net operating income (NOI) estimate.

This type of valuation differs from that included in a residential appraisal because it identifies the potential for revenue that’s unique to a commercial property. NOI is calculated by assessing the gross income potential and subtracting the expenses of operation. This might seem like a simple calculation, but there are a number of factors that determine the outcome. Some of these criteria include the rental rate of existing leases, the rental and vacancy rates of comparable properties, and the condition and square footage of the property.

What Are the Different Methods for CRE Validation?

Validating a commercial real estate appraisal can be done in several ways. Some appraisers adopt a methodology that relies primarily on sales comparisons to establish a value. This method entails reviewing recent sales of comparable properties to identify the average price per square foot in a given market. This is used to calculate the value of the appraised commercial property. Appraisals of new construction often rely on another kind of appraisal method, which assesses the cost of replacement for a property. This is based on the land value and a comparison of sales of comparable properties. This data is used to identify a figure that estimates the total hypothetical cost of rebuilding the new structure.

How to Increase the Value of a Commercial Real Estate Appraisal

If you’re preparing for a commercial real estate appraisal and wondering what kind of figure you’ll see, you might be nervous about the results — and rightfully so. A lower-than-expected appraisal can have serious consequences for your business. So how can you increase the prospective value of your commercial real estate appraisal? There are a few strategies you can employ, including the following:

  • Increase rental rates
  • Make improvements
  • Minimize expenses
  • Reduce vacancies

All of these approaches can help you optimize the value of your commercial property and get the best results from a commercial real estate appraisal. Remember, too, that you can request a second appraisal if you want another opinion.

Commercial Real Estate Appraisals in Denver, CO

When you’re having your commercial property appraised, you want experts who will be attentive to every detail. The accuracy of your appraisal depends on the qualifications of your appraiser, so it’s worth your time to seek out the best provider. Unique Properties, Inc. is the top commercial real estate appraiser in Denver, CO, serving investors, landlords, and business owners. For more information, call us at (303) 321-5888 or reach out to us online.

Image Source: hans engbers / Shutterstock

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