What Determines the Value of Commercial Property?

You’ve been eyeing an upcoming commercial building in your area. Out of curiosity, you decide to ask around for the cost of the property. Well, the eye-popping figures you hear make you wonder why property prices are so high.

First off, Melbourne Property Valuers Metro is a full-service and accredited valuation firm with 300+ years of combined experience. We asked the firm’s experienced valuers about the variables that typically make some commercial properties more expensive than others. Here’s a compilation of our findings.

1. Location

Undoubtedly, some investors may feel priced out of the market in particular areas. Due to scarcity and other variables, land in CBDs, regional towns, and other sought-after locations will naturally be higher than in other areas.

Case in point, a property situated in an area with adequate mass transit systems will be pricier than one in a far-flung region of the city. Similarly, the easier it is to access a particular building, the more you can expect to pay for it.

Surrounding properties can also make a difference in the price. That is, proximity to noise, industry, or other issues can influence the price of a building over time. If, for instance, a building is in an area with plenty of restaurants or eateries, it will more likely be expensive as it offers immense commercial potential and visibility.

2. Size and Amenities

How large is the commercial property? Generally, the bigger the property, the more valuable it is and vice versa.

We also judge commercial properties based on their amenities and features. To this end, if the property has all the luxuries and fittings tenants want, it will be more expensive. For instance, larger office spaces with adequate parking facilities and other features, such as a gym or fitness center, demand a higher cost. Likewise, amenities such as dedicated green spaces, elevators, ready access to essential services like banks, and other offerings, tend to increase a building’s value.

3. Demand or Supply

Basic economics dictates that demand and supply influence the cost of a product or service. So, in reference to commercial properties, the same principle applies. Put simply, how much people are willing to pay for a property affects its market value.

For instance, if an area has a high demand for commercial properties but a limited supply of buildings, the value of existing properties goes up faster than a helium-filled balloon. Conversely, if there’s a surplus of commercial buildings begging for tenants, their value plummets. In other words, demand-supply dynamics are often to blame for fluctuating property values.

4. Prevailing Interest Rates

When interest rates increase, the cost of borrowing money to finance commercial properties also goes up. This, in turn, makes it more expensive for investors to buy properties. In turn, fewer people are willing to pay the asking price, which may result in a drop in value.

On the other hand, a drop in interest rates implies borrowers can access credit at lower costs, which can directly affect the value of the commercial real estate. Put differently, an increase in buying power leads to an upsurge in demand and, subsequently higher prices.

For example, if an investor wants to finance a new office building and the interest rate is high, they may decide to delay the project or look for a cheaper alternative. But if the rates are low, they could take out a loan and proceed with the project.

5. Age and Condition

Would you expect to pay an arm and a leg for a dilapidated commercial property? Most likely not – and for a good reason. The age and state of a building can be significant determinants when valuing commercial property.

Thus, new or well-maintained buildings that don’t require substantial repairs or renovation typically command higher prices. In fact, even rental income tends to decrease as a building ages, making it less appealing to prospective investors. Even so, if a building is located in a historic district, its age may add more value.

6. Economic Outlook

The general economic environment also affects the cost of commercial real estate. For instance, if an area is experiencing a recession and businesses are closing, fewer investors will be willing to invest in commercial properties.

Even tenants suffer as some may not afford the rent, which can lead to business closure. This reduces demand and lowers the price of such buildings.

Case in point, the global pandemic severely impacted the commercial real estate market, with many businesses shutting up shop and vacancy rates rising. On the contrary, the prospect of economic growth tends to entice more investors into acquiring commercial properties – leading to higher property value or cost.

A multitude of variables impacts the value of a commercial property. Thus, before signing on the dotted line and investing, consider all the factors at play. And to get the exact value of a property on your radar, consult a trustworthy professional valuer. By so doing, you won’t invest blindly or make costly investment decisions.