How can you use comparable properties to support your commercial real estate valuation assumptions?

1 What are comps?

Comps are properties that are similar to your property in terms of location, size, condition, features, and use. They are used as benchmarks to compare and contrast your property's value with the market value of other properties. Comps can help you estimate the income, expenses, and capitalization rate of your property, as well as the sales price per square foot or unit. Comps can also help you identify the strengths and weaknesses of your property, as well as the opportunities and threats in the market.

2 How to find and select comps?

Finding and selecting comps can be challenging, especially in a dynamic and diverse market. You need to have access to reliable and updated data sources, such as commercial real estate databases, brokers, appraisers, and public records. You also need to have a good understanding of the market area, the submarket, and the neighborhood where your property is located. You should look for comps that are as close as possible to your property in terms of distance, time, and characteristics. Ideally, you should use at least three to five comps for each valuation method.

3 How to use comps to adjust your valuation models?

Once you have found and selected your comps, you need to use them to adjust your valuation models. There are three main methods for commercial real estate: the income approach, the sales comparison approach, and the cost approach. Each has its own pros and cons depending on the type, condition, and purpose of your property. To adjust your valuation models with comps, you can apply different techniques like the direct capitalization method, which uses net operating income (NOI) and the capitalization rate (CAP rate) of your property and comps to estimate the value. You can also use the gross rent multiplier method, which uses gross annual rent and gross rent multiplier (GRM) of your property and comps to estimate the value. Additionally, there's the sales comparison method that utilizes sales price per square foot or per unit of your property and comps to estimate the value. Lastly, there's the cost approach which uses replacement cost and depreciation of your property and comps to estimate the value. Utilizing comps to support your valuation assumptions can help you attain a more accurate and realistic valuation of your commercial real estate property. However, you should also consider other factors such as market conditions, demand and supply, highest and best use, and specific features and benefits of your property. Comps are not your only tool but they are a valuable one for your valuation process.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?