Often in our commercial real estate practice, we’re asked for our opinion of the value of a commercial asset.
These can be as loose as a “back of an envelope” guess to a full-blown appraisal conducted by a certified appraiser.
Generally, an appraisal is required if financing is being originated or if one of the title holders has died, necessitating a “time of death” appraisal. The commercial real estate brokerage profession works arm-in-arm with appraisers.
You see, we track key data (such as lease comps) that is included in an appraiser’s work. Generally, in return for our cooperation, an appraiser will share her data with us.
Sometimes we’ll even get specifics on the appraisal task — the address, nature of the value assignment and results. But today, I’ll focus on the appraisal’s little sister, what’s known as a “broker opinion of value.” By the way, my references here are excerpts from a conversation I had.
Scope of the assignment: We were engaged by a local property owner to provide a broker opinion of value. The real estate was bought in 1997 for the purpose of housing their operating company. Now they wanted to know the value of the real estate for internal purposes.
Property description: The property has approximately 100,000 square feet of warehouse space suitable for manufacturing and distribution purposes. It features both ground-level and dock-high loading doors. It has a 24-foot minimum warehouse ceiling clearance, advantageous for storing and handling large inventory or equipment.
With 1,200 amps of power, the property can support a variety of industrial manufacturing uses and has ample parking spaces (approximately 200). A fenced yard adds security, staging and storage options. Its location offers excellent access to Los Angeles and Orange counties.
Methodology: Our understanding of the Orange County California sub-market dates back to 1984 when we began our career at Lee & Associates. Our company, and specifically our team, has been very active in the industrial arena, leasing and selling buildings of all sizes to a variety of investors and owner-occupants.
We consider ourselves to be market experts in this asset class of commercial real estate.
To properly estimate the value of our client’s property, we analyzed four specific segments of the market: comparable sales, comparable leases, available sales and available leases. A comparison was drawn to buildings that closely approximate the amenities contained in our client’s property. We only included deals that afforded specific transaction points.
Additionally, we considered the types of potential buyers and tenants that would consider leasing if it was available for sale or lease. Finally, we examined general economic trends and their impact on industrial values.
Review of comps and availabilities: Ideally, we look for three to five properties to use as comps. Four comparable sales and five sale availabilities were considered. We also looked at four comparable lease transactions and three lease availabilities.
Comparable sales: We surveyed 75,000-125,000-square-foot properties in six cities. In order to get to four properties, we included sales dating back to July 2022 because only one sale has occurred this year in the range and cities surveyed. Of the four considered, square footage ranged from a low of 76,232 to a high of 123,650.
Pricing ranged from $295-$316 per square foot. However, the $316 comp occurred before the interest rates went up and slowed sale volume. Two of the buildings were bought by occupants and two by investors.
Potential tenants or purchasers: Our client’s property would appeal to a variety of logistics providers or light manufacturing companies. Logistics providers require dock-high loading, adequate sprinklers for high-pile storage and a proper turn radius for 53-foot trailers. Our client’s property lacks the cube and sprinkler calculation for most modern logistics providers.
A light manufacturing operation would require heavy power, office space sufficient to support different department operations, and a fenced and secured yard area for storage of raw materials and staging. Our property contains all of these amenities, so it would have great appeal for a buyer looking to occupy the building with a manufacturing business or a tenant needing a location.
Many private investors are in the market and looking for good quality industrial investments.
Most are driven by a return on their invested capital. Returns are in the 5.5-6.5% range for all cash purchasers. If a private investor must acquire the property using financing, the capitalization rate would have to be greater than his cost of financing – in the 7.5-8% range. Sale activity throughout Southern California has waned since the halcyon days of 2021 and 2022 when institutional buyers were active. Declining sales have led to fewer exchange-motivated investors.
Market conditions: Discussed here was the total square footage of the market and corresponding vacancy plus the footage of the specific size range – in this case, 75,000-125,000 square feet. If this distinction isn’t drawn, an improper look at vacancy emerges. We’ll also sprinkle in some economic head- or tailwinds including interest rates, global factors such as war or pandemics, elections and recession fears.
Special circumstances: In our example, here are the considerations. The owners have held and operated from this location since 1997. We have seen a tremendous upward elevation of rental rates and sales prices since that period of time.
The owners have subsidized the rent for the operating company for several years. Consequently, the rental rate paid is substantially below that of the market. Such a subsidy causes an inflated estimate of the EBIDA and an understatement of the value of a capitalized market rent.
Conclusion and estimate of value: We believe the buyer who will value our client’s property the highest is an owner-occupant followed by a private investor. We don’t believe the building would garner any interest from a developer seeking to demolish the building and seek a higher and better use.
In our packet to the owner, we included estimates of value for purchase by an occupant, leasee or investor. We also included a disclaiming paragraph so that our opinion is not misused. It goes something like this: This broker opinion of value is based on sources from which we deem reliable. This is not an appraisal. Portions of this opinion could be used to form an appraisal.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.
