Compared to the residential side of our profession, the commercial real estate sales process is far more challenging, involving, for example, zoning considerations, property usage, capital returns expectations, property management arrangements and numerous inspections (including Americans with Disabilities Act (ADA) accessibility, environmental, HVAC and electrical).
Further, commercial properties come in a range of types, sizes and locations. “Commercial real estate,” whether for investment or owner use, includes:
Due to all of these factors, commercial property valuation and marketing are very rigorous processes, as we’ll describe in this article. What can property sellers expect from their commercial real estate agent in these two areas?
The sales price is usually based on the “broker’s opinion of value” (BOV), also known as a comparative price analysis. Commercial brokers can develop a BOV in a matter of days. (In my firm, a BOV is complementary and provided with no obligation to the sellers.) It’s important to note that the BOV cannot be used as an appraisal figure as required by a mortgage lender.
While residential real estate valuation is primarily based on comparable prices (“comps”) in the neighborhood, commercial real estate valuation is more complex. There are fewer comparable benchmarks – similar properties in similar locations. Fortunately, commercial agents have access to very rigorous, data-driven systems that factor in historical and projected sales and leasing trend information. This information is considered in conjunction with detailed geographic market and submarket data for various types of commercial property. At Impact Commercial Real Estate, we use CoStar™, one of the industry’s most robust commercial real estate analytics services, to obtain this valuable information.
Since commercial investment property can be either for investment or owner use, the BOV reflects both income and the capital return the owner can expect from the property. Additionally, value is measured to some extent by “replacement costs” – the cost to build a new structure similar to the property for sale. Other factors to consider in valuing commercial property include the current state of the economy and the seller’s exit timeline and exit plan.
Clearly, commercial property valuation is complex, but it’s important to get it right. Regardless of whether the property owner is actively selling, they should always have a current BOV. Some agents, like me, offer valuation consulting services at no charge and with no obligation.
We should note here also that the valuation or selling price should take into account whether the property lies within an economic Opportunity Zone. Opportunity Zones are based on a federal program adopted in 2017 to allow states to designate certain urban and rural communities within which property owners receive favorable federal capital gains treatment.
The Colorado Office of Economic Development and International Trade (OEDIT) has granted a number of urban neighborhoods and rural communities Opportunity Zone status to promote economic development, job creation and business startup activity in those locations.
Marketing commercial real estate is equally complex and multifaceted. A commercial real estate agent has access to proprietary, segmented databases of potential buyers in the categories identified above. These lists include previous commercial property buyers and others that might be in the market for any number of reasons.
The agent also will promote a seller’s interests in three other critical ways:
There’s a good reason some brokers and firms specialize in commercial real estate. It’s a world apart from residential transactions – valuation techniques and marketing strategies are two of the primary differences.
Danchen Astle is Senior Vice President at IMPACT Commercial Real Estate in Denver and has been an active real estate broker for 18 years. A native of Guangzhou, China, Danchen moved to the U.S. in 1992 and is fluent in Chinese Mandarin, Cantonese, and English. Contact her at email@example.com or 303.332.5955.
IMPACT Commercial Real Estate is a commercial real estate firm focused on making an impact on businesses and the community through creative, thoughtful and dynamic real estate services. IMPACT offers a full range of real estate services including, but not limited to, exclusive brokerage representation for Sellers, Buyers, Landlords and Tenants, broker price opinions, real estate consulting services and strategic property dispositions.