There are a few major methodologies and then many more within the details of the proper application of said methodologies. Major methodologies that I've seen are income, cost, residual and comparable. Which one you use and how you apply it vary widely depending on the status of the asset, the availability of data, the market and other such factors.

As an example, the initial yields are so low in Western Europe that I've most commonly seen an income approach where the assets cash flows are forecast long-term (30+ years) and then an applicable discount rate is applied. Effectively, this is valuing real estate as a bond with a risk premium with little to no regard to the residual value of the asset. This is just a reality of how many opportunities are evaluated today given low interest rates and decreased spreads.

The gold standard seems to be the Royal Institute of Chartered Surveyors ("RICS") who release annual standards via their 'red book.' You can find older versions online and read through the real estate sections to get more details on all of the above.

 
Most Helpful

A professional valuation firm will apply various weightings to three main types, each described below:

sales comparison approach: Simply, they look at the market for comparable assets to the valuation in question that have sold recently. They will typically then apply that $/unit and/or cap rate to the valuation.

Income/Capitalization Approach: Takes the net operating income less capex reserves and divides it by a cap rate. For this method, the most important aspect is obviously the cap rate...but also heavily analyzed and debated is the NOI that is used.

Discounted Cash Flow Approach: Takes in place operations, uses a market growth rate, and projects the property cash flows out 10 years at which point it assumes a sale. It will then discount these cash flows back to a current NPV. Here, the base NOI is very important as this is what will be compounded for future years...but also the discount rate -- which is very debatable and oftentimes has a lot of wiggle room with the appraiser to arrive at a realistic approach.

OF these three methods, Id say ranking in order from most to least useful is the sales approach, then direct cap approach followed by the DCF approach. Oftentimes the sales approach will be discounted back slightly in place for the direct cap approach when there is simply not a record of sale for a comparable asset within an acceptable time frame. But fact is something will sell for what someone is willing to pay for it. Thus if one of your comps in the market just sold...it will be hard to have a valuation that doesnt tie back to that result.

 

Good reply here OP - I'd disagree with most to least important ranking though. The sales comparison approach is a useful sanity check, but you'll never see an appraiser or investor go solely off comps. Mostly its used to determine cap rates and also check that the $PSF/$ per unit you're paying/valued at is in line with the market. I guess you could argue that because of that sanity check its the most important method.

Direct cap approach is by far the most commonly used in the industry to get a quick value.

You can also look at replacement cost - i.e. what would it cost to build the same building in today's dollars, plus the cost of buying the land. This is typically used as a reference point, ideally you should be buying below replacement cost.

 

Understanding how to properly value commercial real estate is perhaps the most important component in deciding whether or not to include it in your investment portfolio. Every serious commercial real estate investor must be able to effectively analyze acquisition properties and their own holdings; you simply cannot succeed in this business without knowing how to calculate a property's market value. Investors consider a multitude of approaches to determining the value of a commercial property. Let's look at a couple of the more popular and effective approaches.

1. Cost Approach

2. Income Capitalization Approach

3. Sales Comparison Approach

4. Value Per Gross Rent Multiplier

5. Value Per Door

6. Other Approaches

 

The appraised value of a commercial property is frequently used to determine whether to buy, sell, borrow, or lease it. However, determining that value is not easy. Commercial evaluations, whether for an apartment building, an industrial complex, a retail shopping centre, or an owner-occupied company facility, are often more subjective than residential appraisals.

Why? Commercial values are frequently influenced by uncontrollable factors such as the present market price at which spaces rent, fewer comparables accessible, and total upkeep expenses (which can vary dramatically from industry to industry). Then there's the difficult question of how much a buyer is willing to pay.
1. A cost-benefit analysis
2. Sales comparison strategy
3. Income capitalization strategy
4. Gross Rent Multiplier Value
5. Price per door
6. Rentable square foot cost

 

Ea laboriosam molestias tempore consequatur. Omnis quaerat et est laboriosam et. Quod quia veritatis molestias pariatur. Dolores reprehenderit tempore voluptatem quos fugit pariatur asperiores. Cumque sed et qui. Repudiandae vel vero nisi magni dolorem exercitationem reiciendis.

Adipisci esse sunt iusto fugiat neque assumenda accusamus. Excepturi omnis dolores ex quos voluptate voluptatem et. Quae et dicta nulla voluptates sit ut.

Vero quia minima nostrum repellat id. Doloremque ut quaerat modi in illo illum. Sit omnis repellat dolor voluptas rem qui. Excepturi rerum cumque et qui. At similique accusamus dolor non omnis. Non provident quia quod.

Quam quia natus rem quo. Molestiae eius consectetur quia placeat. Occaecati corrupti earum incidunt occaecati odio ut et. Eos laboriosam quis assumenda sequi dolorem sapiente debitis molestias.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”