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

Acquisition & Sales

Block Real Estate Services

LinkedIn