The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
When conducting a valuation on a piece of industrial real estate there are three methods one can take. The first is looking at comparable sales when it comes to similar properties within the region but taking into consideration what differences might exist between the two properties. The second looks at what the cost would be to replicate the building or property from the ground up. The third is determining what kind of income stream that property is likely to generate. Oftentimes, valuing these properties will take using more than one method at once.
Richard Wilson: What is a typical valuation methods, or unique about the valuation of industrial real estate properties?
Robert Borris: Well, that’s a great question, and it depends. In the appraisal business there are 3 methods of evaluating any piece of property. One is what are comparable sales, one of the unusual things about commercial real estate is not every building is the same even though they might be the same size, they could be very different, but comparable sales number one. Number two is what would it cost to replicate, if I had to go out and build this thing what would that cost me? And the third is based on income stream. So these three things are really very different from each other, so what you want to be able to look at a building and say “Okay, how much is this going to cost me to buy, bricks and mortar, and yet when I get done with it, what’s the income stream going to be worth?” They’re very different things, and that’s where the money is. It’s in between those two.
Richard: Right, okay.
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