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Valuation of Commercial Real Estate: Part 1

Commercial real estate comes in four varieties: Office, Industrial, Retail and Multifamily.
Office buildings range from single story to skyscrapers.

  • Highest profile “trophy” properties
  • Fundamentals most impacted by employment
  • Highest costs upon lease rollover
  • Trends towards larger floor plans, open working spaces, mixed-use environments.
Industrial buildings have the lowest tenant improvement (TI) costs of all property types.
  • Distribution Warehouse Space
    • Trend towards larger spaces, higher clear heights
    • Driven by demand for storing and distribution
      • i.e. BNSF Intermodal – Gardner, KS
    • Just-in-time delivery drives demand for location
      • i.e. UPS Worldport – Louisville, KY
  • Manufacturing Space
    • Diminishing demand
    • Most functional obsolescence
    • Potential redevelopment opportunities (i.e. Paseo)

Retail buildings are the most glamorous of the product types.

  • Most quickly evolving
    • Post WWII strip center development
    • 1960’s and 1970’s grocery anchored model
    • 1980’s and 1990’s enclosed mall model
    • Current trend toward lifestyle centers
      • Live, work, play
  • Highest credit risk

Multifamily have the least correlation to performance of other property types.

  • New household formation improving apartment demand
  • Fundamentals highly linked to job growth
  • Most subsidized form of real estate
    • Affordable housing increasing in importance
    • Section 42, section 8, LIHTC, etc.
  • Trend toward sustainable housing. 

Private Equity Buyers

  • Individual Ownership
  • Syndicates or Partnerships – LP or LLC
    • Based on individual transaction
  • Private Equity Funds – LP, “Reg D” structure
    • $25 to $500 million of equity
  • Institutional Advisors
    • Advise pension funds, large endowments, etc.
    • $500 million to $1.25 billion
    • Minimum deal size of $25 million
    • Mix of domestic and international holdings

Publicly Traded

  • Real Estate Investment Trusts (REITs)
  • Similar to institutional advisors
  • Advantages:
    • Access to capital (debt and equity)
    • Broad reach to emerging markets
  • Disadvantages:
    • Public reporting – competition can monitor strategy
    • Long-term nature of real estate not well understood on wall street which emphasizes quarterly returns
    • Decisions made to boost short-term earnings may not maximize long-term investor returns

Click here to see the entire Valuation of Commercial Real Estate.

Contributor: 

Aaron Mesmer - Block Real Estate Services, LLC (BRES)
Acquisition & Sales
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