How to Value Commercial Real Estate
Valuing a commercial building in Rochester or Macomb County starts with understanding that commercial value is driven primarily by income, with comparable sales used as a sanity check. Getting to a reliable number takes more work than looking up what the property next door sold for, and missing any of the core inputs produces a value that is either too high or too low.
Step one is building a clean NOI. Start with actual rental income from the current rent roll, verified against tenant leases. Add in any other income like late fees, parking income, or CAM reimbursements. Subtract a vacancy allowance, usually 5 to 10 percent depending on property type and submarket. Then subtract operating expenses, which should include property taxes at the buyer’s expected uncapped basis, insurance, utilities, repairs and maintenance, management fees even if the owner self manages, and a capital reserve for items like roofs and HVAC.
Step two is applying a market cap rate. A single tenant net lease property on Rochester Road with a credit tenant might get 6.5 to 7 percent. A four tenant strip along Van Dyke might get 7.5 to 8 percent. A multi tenant industrial flex in Warren with some vacancy might get 8.5 to 9.5 percent. Picking the wrong cap rate by even half a point moves the value by five to seven percent, which on a $2 million building is over $100,000.
Step three is sanity checking with comparable sales. Recent transactions in the same submarket for similar property types give a price per square foot benchmark. If the income approach says $180 per foot and every comparable sale is closing at $130, something is off. Maybe the NOI is aggressive, maybe the cap rate is too low, or maybe the property is genuinely special. Either way, the gap needs investigation before the number is trusted.
Step four, and the one most investors skip, is stress testing. What happens to value if a major tenant leaves? If rents are 10 percent below market today but leases do not roll for four years, how does that affect near term cash flow? If one of the larger suites needs $200,000 of tenant improvement capital to release, does the building still pencil? A valuation that only works in the base case is fragile, and fragile valuations often show up as surprises at refinance or at sale.
Michigan’s property tax uncapping is its own step in any commercial valuation. A seller’s tax bill can be dramatically lower than what a buyer will pay starting the year after closing. Using the seller’s number inflates NOI and therefore inflates value. TDG Commercial rebuilds NOI using post sale tax estimates so the valuation reflects what the buyer will actually experience.
TDG Commercial, some of the top commercial realtors in Rochester MI, walks through each of these steps with clients, using local comps and current cap rate data from across Macomb County to produce valuation guidance that holds up under scrutiny.
One item that often changes a valuation late in the process is lease term. A building with the same NOI but leases rolling next year is worth less than the same building with leases rolling in five years, because the near term rollover creates risk. Weighted average lease term, called WALT, matters to buyers and lenders. A WALT above seven years supports stronger valuations. A WALT below three years usually pulls cap rates higher and pushes value down. Sellers planning to list in the next year or two often benefit from starting renewals early, even on softer terms, to extend WALT before going to market.
