A Simple Guide to Understanding Different Types of Commercial Appraisals

If you’re involved in the commercial real estate world—whether as a buyer, seller, lender, or agent—you’ve likely heard the term “commercial appraisal.” But what does it really mean? And did you know that there are different types of appraisals tailored to different property types and situations? This guide will break it all down in a straightforward way.

The Basics: Different Ways to Value a Commercial Property

Commercial appraisals are all about figuring out what a property is worth, but there are a few different ways to do that. Let’s explore the most common methods:

1. Income Capitalization Approach
   • What It Is: This method looks at how much income a property generates—think rental income from tenants. The idea is that a property’s value is closely tied to how much money it brings in.
   • When It’s Used: This is the go-to approach for properties like apartment buildings, shopping centers, and office buildings that earn money through leases.
   • Why It’s Important: If you’re buying or selling a property that makes money, this approach gives you a clear picture of its financial potential.
2. Sales Comparison Approach
   • What It Is: This method compares the property in question to similar properties that have recently sold. Adjustments are made for any differences, like size or location.
   • When It’s Used: This is handy for properties where there are plenty of similar sales to compare, like retail spaces or small office buildings.
   • Why It’s Important: It gives a real-world perspective based on what buyers are actually paying for similar properties.
3. Cost Approach
   • What It Is: This one looks at how much it would cost to replace the property, minus any depreciation. It’s often used for unique properties that don’t have a lot of comparable sales.
   • When It’s Used: Think of places like schools, hospitals, or other specialized buildings.
   • Why It’s Important: It helps when you need to know what it would cost to build the property from scratch.

Different Types of Commercial Properties and Their Appraisals

Not all commercial properties are the same, and neither are their appraisals. Here’s a look at how different types of properties are typically appraised:

1. Retail Property Appraisals
   • What They Are: These include everything from small shops to large malls. Retail properties often make money through leases to various businesses.
   • Best Appraisal Method: The Income Capitalization Approach is usually best here, especially for large retail spaces. For smaller ones, the Sales Comparison Approach can also work well.
   • Why It Matters: Location and foot traffic are key in retail, and these factors heavily influence the property’s income and thereby its value.
2. Industrial Property Appraisals
   • What They Are: These properties are your warehouses, manufacturing plants, and distribution centers. They’re all about functionality and space.
   • Best Appraisal Method: The Cost Approach is often used because these buildings can be very specialized. If the property generates rental income, the Income Capitalization Approach can also be useful.
   • Why It Matters: Things like proximity to transportation and the condition of the facilities are big factors here.
3. Multifamily Property Appraisals
   • What They Are: These are your apartment buildings and condominium projects. They generate income through residential leases.
   • Best Appraisal Method: The Income Capitalization Approach is usually the best fit because it looks at the steady rental income these properties bring in. Sometimes, the Sales Comparison Approach is also helpful, especially if there are similar properties on the market.
   • Why It Matters: Occupancy rates and rental income potential are the key drivers of value for multifamily properties.
4. Office Property Appraisals
   • What They Are: Office buildings, whether single-tenant or multi-tenant, fall into this category.
   • Best Appraisal Method: The Income Capitalization Approach is often the most appropriate because office properties rely heavily on lease income. The Sales Comparison Approach can also be used in areas with lots of office building transactions.
   • Why It Matters: The quality of tenants and the terms of their leases are crucial factors in determining an office property’s value.

Understanding the different types of commercial appraisals and knowing which one applies to your property can make a big difference in how you approach buying, selling, developing, or financing commercial real estate. Each property type has its quirks, and choosing the right appraisal method ensures you get a fair and accurate value.

Whether you’re dealing with a bustling retail space, a sprawling industrial complex, a busy multifamily building, or a sleek office tower, knowing how to assess its value is key to making smart real estate decisions. And when in doubt, partnering with experienced professionals, like our appraisers at Boston Appraisal Services, can help guide you through the process with confidence.