How to Value Commercial Property

Written by bradley james bryant
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How to Value Commercial Property
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Real estate investing requires a deep knowledge about the profitability of commercial real estate property. Ratios provide investors with objective, measurable, and comparable valuations that provide insight into the day-to-day operations and profitability of commercial property. The Gross Rent Multiplier (GRM) ratio is a commonly used ratio to compare commercial property values.

Skill level:
Moderate

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Things you need

  • GRM ratio

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Instructions

  1. 1

    Review the Gross Rent Multiplier ratio capitalisation method. The GRM approach uses rental income as a proxy for future cash flows.

  2. 2

    Gather your data. To use the Gross Rent Multiplier approach you will need the GRM ratio. This can be obtained from a local commercial appraiser or a commercial real estate agent.

  3. 3

    Define your variables. For the purpose of this example, let's say you're interested in a commercial office part on sale for £5,850,000 and you want to value the property. Gross rents for the building are £780,000 per year and the appraiser says the GRM for the area is 8.

  4. 4

    Calculate the value of the commercial property based on gross rents. Multiply the GRM ratio by the gross rents for the complex. The calculation is: Value of Commercial Property = Annual Gross Rents x Gross Rent Multiplier (GRM). When we plug in the numbers, the equation is: £6,240,000 = £780,000 x 8 (GRM).

  5. 5

    Evaluate the results. The office complex is on sale for £5,850,000 and the value of the property is £6,240,000. The valuation shows a profit of £390,000.

Tips and warnings

  • Try to validate the GRM for the area through at least three different sources.
  • Review the gross rents calculation and run through scenario analysis to postulate a best- and worst-case valuation based on vacancy.
  • Ask the property manager for a vacancy report for the past two years.
  • Inquire about major construction projects around the site. Understand how this will effect your vacancy rate and/or average rent per square foot.

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