What Changes the Value of Commercial Property?

Commercial real estate is different than residential real estate for a myriad of reasons. Perhaps the biggest one is that it is often purely an investment, even when it is an owner/user purchase. Residential real estate can also be an investment, but for most people, those properties are their homes first, an investment second. Yet just as people take care of their homes with an eye toward how changes affect their home value, it is even more vital for investors in commercial properties to be aware of what can change the value of their property.

Changes in supply and demand are one of the biggest factors in commercial property value. Competition for properties, and the number of interested parties can certainly raise the value of commercial real estate. Some of that is related directly to demographics. Growing populations create more of a need for commercial uses.

Externally, economic forces such as an increase in interest rates like what we’ve seen over the last 18 months, tend to flatten the demand for commercial properties. The interest rates affect the ability of buyers to finance purchases. As SFGate reports, “Commercial properties and  their market values react to broad economic conditions.”

According to Forbes, commercial real estate can be a hedge against inflation. “As the purchasing power of a currency drops, average property values tend to increase alongside new and existing commercial rentals as lease renewal rates increase. This is largely the case with already developed properties which have been around for some time. It’s likely that the interest rates on any loans taken out to purchase those properties were lower before inflation hit.”

The property itself can also be a determining factor in changes to the property value. If it’s an income-producing property, the ability of that property to generate income has an impact on the property’s value. On a gross basis, the rent a property receives, and on a net basis, the income to the owner after expenses, all play a role in changes to the value. Increased property tax assessments and operating expenses can reduce the value of properties as the net income declines.  Additionally, the presence of deferred maintenance can cause values to decline.

The loss of a tenant can affect not just the property the tenant was renting but could also impact surrounding properties. In a retail environment, for example, if a big anchor store in a shopping complex leaves, that can have a negative impact on the surrounding businesses and property values if a new tenant does not take over that property. That doesn’t mean the loss of a tenant always decreases value. If there’s enough synergy in an area, the loss of one tenant might not affect the surrounding businesses and properties. if there’s a realistic expectation that a similar tenant will come into that space and create the same kind of traffic.

Coming back to demographics, rises or declines in populations. changes in the number of households and median incomes can have a positive or negative impact on commercial properties. For those investing in commercial properties, it’s worth keeping an eye on all these factors to evaluate your property’s worth.

Estate Planning for Commercial Real Estate

Estate planning is never much fun, but it’s necessary to plan how to leave behind an inheritance for heirs and to reduce or even eliminate the tax burden on an estate. If you own commercial real estate, hiring an appraiser who specializes in this type of property is a crucial part of estate planning.

In this part of the country, we do a lot of estate planning appraisals for farms, but we can handle most any multi-family, industrial, office, or retail property. We work in both Illinois and Iowa, which have different laws and tax implications for estate planning. When estate planning isn’t handled properly, it often results in excessive legal fees, increased tax liabilities, and potential legal fights among heirs. Planning helps eliminate these sorts of problems before they occur.

Commercial real estate presents unique opportunities and challenges. One of the biggest considerations for estate planning is reducing tax liabilities, which is a huge concern, especially for owners of commercial properties. It’s important to enlist the help of experts like us, as planning can become complicated. A commercial real estate specialist can help plan for dividing property among heirs. We can also help appraise properties with multiple owners.

Roy R. Fisher is experienced in valuing real estate of all types of commercial properties, whether you own an arcade, a welding shop, or a restaurant. Our appraisals can help you make choices about changes needed now to make the estate transition run smoothly in the future.

Benefits of Going with a Real Estate Agent

Commercial real estate is different from residential real estate and comes with a myriad of complexities that are easier to navigate with a dedicated professional by your side.

“A full-time commercial broker practitioner is in the market every day of every week,” says Rick Schaefer of Ruhl Commercial. “We are keenly aware of current market conditions, affecting supply and demand, pricing, market trends, lease language, purchase agreement language and what is fair and reasonable.”

architecture presentationA large part of the commercial real estate market includes leasing. It’s important to work with an agent who understands all the complexities of leasing, whether you’re a landlord, a buyer, or a seller. It’s also important to communicate what you need from your agent to get the most out of the business relationship. Be sure to tell the agent what you expect from them, and they’ll be better positioned to serve your needs and secure the right deal.

Marge Stratton of Mel Foster Commercial Real Estate Services says there are several key reasons why you should hire a commercial real estate professional. Despite concerns about costs with paying a commission, Stratton says that working with a dedicated professional will usually result in a better deal, negating any costs from commissions. And the experience of that dedicated professional is another key reason. “Relationships fostered over years of working in the business that can give them an edge to help you find the perfect location,” says Stratton.

“We have knowledge of zoning regulations, building code requirements and many other potential issues to help our client avoid costly mistakes,” says Schaefer. “We assist clients with identifying and evaluating all reasonable options to determine the best possible real estate solution.” This can include navigating due diligence items on a piece of property, recommending third party vendors, coordinating inspections, and even helping clients find financing and legal counsel to close a transaction. 

Stratton echoes this sentiment. “Working with lawyers, architects, contractors, designers, move managers, and property managers,” she says, means that, “your commercial real estate professional will ensure the space you end up in is exactly how you pictured it.“

An agent can and should present you with a market analysis with comparable properties. Depending on how you plan to use the property, an agent may be able to provide a marketing plan with details about how to find the right tenants in a rental situation, or a comparison with similar properties in another commercial situation. Where they can’t help, an agent can refer you to other professionals to share their areas of expertise. There are a lot of moving parts in commercial estate, and the agent is there to help at every stage.

In other words, you don’t hire a commercial real estate agent just to show you properties, or just to sell you properties. You hire a professional to help manage the entire process.