By: Michael H. Folb, Designated Broker
While there are several asset classes within commercial real estate, it is overwhelmingly dominated by income producing properties. To determine value, we consider data on comparable sales and replacement cost, but we mostly look at the income being produced and divide by a capitalization rate (cap rate).
To the uninitiated, the lower the cap rate, the higher the value. For example, if a property is producing $100,000 in net operating income and the market cap rate is 10%, the value of the asset would be $1,000,000 ($100,000 divided by 10%). If the market cap rate is 8%, the value would be $1,250,000 ($100,000 divided by 8%).
There can be other factors to consider such as available financing where one is balancing proceeds from a lender with equity dollars.
In general, cap rates are influenced by the perceived risk associated with a property, but an experienced broker/agent should be well versed as to the operative metrics to be applied to the various classes.