Appraising the value of a commercial building means figuring out how much it’s worth in today’s market. Unlike residential property, commercial real estate is valued not just by size and location but also by how much money it can make. Appraisers usually use three main methods:
- Income Approach – looks at how much income the property generates (like rent). It uses the net operating income (NOI) and a capitalization rate (cap rate) to calculate value.
- Formula: Value = NOI ÷ Cap Rate
- Example: If a building makes $200,000 net income yearly and the cap rate is 8%, the value = $200,000 ÷ 0.08 = $2.5 million.
- Sales Comparison Approach – compares the building to similar properties recently sold nearby, adjusting for size, location, condition, and use.
- Cost Approach – calculates what it would cost to rebuild the property today (minus depreciation) plus the value of the land.
👉 In practice, appraisers often use a combination of these methods depending on the type of building (office, retail, industrial, multifamily) and local market conditions.
Here’s a simple table showing which appraisal method is most commonly used for different types of commercial buildings:
| Property Type | Most Common Method | Why It’s Used |
|---|---|---|
| Office Buildings | Income Approach | Rents and leases are the main value driver. |
| Retail (shops, malls) | Income Approach + Sales Comparison | Income matters, but comps help show market demand. |
| Apartments / Multifamily | Income Approach | Strong focus on rental income and occupancy rates. |
| Industrial / Warehouses | Income Approach | Value depends on long-term tenant leases. |
| Hotels | Income Approach (sometimes Cost) | Based on daily/annual revenue and expenses. |
| Special Use (churches, schools, hospitals) | Cost Approach | Hard to find comparable sales; focus on land + rebuild cost. |
👉 In short: if it earns income, the income approach dominates; if it’s unique, the cost approach is used; and if there are plenty of recent sales, the sales comparison adds context.
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What is a commercial appraisal?