If you are trying to value a commercial property, the simplest formula you will hear is:
Value = Net Operating Income ÷ Capitalization Rate
That formula is important, but it is not the whole answer.
Commercial property is generally valued using three approaches: the income capitalization approach, the sales comparison approach, and the cost approach. The right method depends on the property, the quality of the available market data, and the type of value you are trying to estimate.
For an income-producing office, industrial, retail, or multifamily property, the income approach often gets the most attention because buyers are ultimately purchasing a stream of future cash flows. But even then, you need to understand the leases behind those cash flows, determine whether current income is sustainable, select market-supported capitalization or discount rates, and compare the result with actual transactions.
Jump to: What are you valuing? · Three approaches to value · Build the property cash flow · Direct capitalization · Discounted cash flow · Sales comparison · Cost approach · Reconcile the results · Worked example · Common mistakes · FAQ
Start by defining what you are trying to value
Before selecting a formula, it helps to define the question.
An appraiser estimating market value is answering a different question from an investor deciding the maximum price that produces a 12% return.
Market value generally refers to the price a property would most likely command in a competitive and open market, assuming a normally motivated and informed buyer and seller and no unusual pressure on either party.
Investment value is different. It is the value of the property to a particular investor based on that investor’s assumptions, objectives, financing, tax position, and required return.
Suppose the market supports a value of $5 million for a property. One investor might only be willing to pay $4.5 million because of a higher required return. Another might pay $5.2 million because the property fits an adjacent assemblage or creates some other benefit that most buyers cannot capture.
None of those numbers necessarily represents a mistake. They answer different questions.
There is also a distinction between value and price. Value is an opinion based on a defined set of assumptions as of a particular date. Price is what someone actually agrees to pay. A transaction can take place above or below a reasonable estimate of market value.
For most acquisition underwriting, it is useful to do both analyses:
- Estimate what the property is worth based on market evidence.
- Determine what the property is worth to you based on your business plan and return requirements.
Those two numbers give you the basis for making an offer.
Know which property interest you are valuing
Commercial real estate also comes with property rights and contractual interests that can materially affect value.
A building leased for ten years at above-market rent is economically different from an identical vacant building. A property burdened by a below-market long-term lease is different again.
Depending on the assignment, an appraiser may be valuing the fee simple interest, leased fee interest, leasehold interest, or another defined interest in the property.
For ordinary acquisition analysis, you do not need to turn this into an appraisal textbook. You do need to understand that you are buying more than land and improvements. When leases are in place, you are also buying the economic consequences of those leases.
The three approaches to commercial property valuation
Professional real estate valuation is organized around three basic approaches.
| Approach | Basic idea | Often most useful when |
|---|---|---|
| Income capitalization approach | Convert the property’s expected income into an indication of present value | The property is purchased primarily for its income |
| Sales comparison approach | Compare the property with similar properties that have sold | Good comparable transactions are available |
| Cost approach | Estimate land value plus the current cost of the improvements, less depreciation and obsolescence | The property is new, specialized, or difficult to compare with other sales |
These approaches are not three formulas that must produce the same answer.
Each looks at the property from a different direction. The usefulness of each approach depends on the property and the available evidence.
A stabilized apartment building in an active investment market may be analyzed primarily through the income approach, with comparable sales providing strong supporting evidence. A newly constructed special-purpose facility may require much more reliance on the cost approach. Vacant land is normally analyzed primarily through comparable land sales.
The important question is which method best reflects how buyers and sellers in this market are actually making decisions.
Highest and best use can come before the valuation itself
Most acquisition analyses begin with the assumption that the property’s existing use will continue. Often that is reasonable.
Sometimes it is not.
A small industrial building on land that has become valuable for high-density development may be worth more as a redevelopment site than as an industrial investment. An obsolete retail property may have greater value after conversion to another use.
This is why appraisal practice considers the property’s highest and best use before simply capitalizing its existing income.
For a conventional, stabilized income property with no obvious redevelopment angle, the existing use will usually be the practical starting point. When the land or improvements appear underutilized, the use itself deserves analysis before you settle on a valuation method.
For an income property, start with the property cash flow
The income approach only works if the income being capitalized is meaningful.
That sounds obvious, but this is where a large share of commercial real estate valuation errors begin.
A seller may give you a trailing 12-month operating statement showing $300,000 of NOI. That does not automatically mean $300,000 is the right NOI to capitalize.
You first need to understand how the property actually operates.
Useful source documents usually include:
- The current rent roll
- Copies or abstracts of the leases
- The trailing 12-month operating statement
- Several years of historical income and expenses when available
- Property tax and insurance bills
- Utility and maintenance history
- Information about recent capital expenditures
- Market rent and vacancy data
- Comparable leases and sales
The objective is to move from the property’s accounting history to an estimate of the income a typical market participant would expect the property to generate.
Build net operating income
At a basic level, the property cash flow looks like this:
Potential Gross Income
− Vacancy and Credit Loss
+ Other Income
= Effective Gross Income
− Operating Expenses
= Net Operating Income
Net operating income, or NOI, is property-level income before financing and income taxes.
Debt service is not an operating expense. Neither are investor income taxes or depreciation deductions. Capital expenditures and leasing costs also require separate treatment from ordinary operating expenses.
That distinction matters because the NOI definition used in your valuation needs to be consistent with the market evidence used to select your cap rate.
Actual NOI and stabilized NOI are not necessarily the same
Suppose a property is temporarily 70% occupied because two tenants recently moved out.
Capitalizing that depressed NOI forever would probably understate the value if the market reasonably expects the vacant suites to lease.
The opposite problem is also common. A building may currently be 100% occupied, but several leases expire next year and rents are significantly above market. Simply capitalizing today’s NOI may overstate what a buyer is really acquiring.
A stabilized NOI attempts to reflect normal, sustainable operations rather than an unusual temporary condition.
This requires judgment. You might need to adjust:
- Contract rent toward market rent when appropriate
- Vacancy toward a stabilized market level
- Operating expenses that are unusually high or low
- Property taxes following a sale
- Management fees
- Recoveries and reimbursements
- Nonrecurring income or expenses
- Deferred maintenance or other conditions affecting future operations
The goal is not to manufacture a smoother number. It is to understand which cash flows a buyer can reasonably expect to continue.
Valuing commercial property with direct capitalization
Once you have an appropriate stabilized NOI, the most familiar income valuation technique is direct capitalization.
The formula is:
Property Value = Stabilized NOI ÷ Capitalization Rate
Suppose a property is expected to produce $280,000 of stabilized NOI and comparable transactions support a 6.50% capitalization rate.
The indicated value is:
$280,000 ÷ 6.50% = $4,307,692
Rounded appropriately, the direct capitalization analysis indicates a value of about $4.31 million.
The arithmetic is easy. Determining the correct NOI and capitalization rate is where the real work takes place.
Where does the cap rate come from?
A capitalization rate should reflect the market for the property you are valuing.
One of the strongest sources is comparable sales. If a similar property sold for $5 million and its appropriate NOI at the time of sale was $325,000, the transaction indicates a 6.50% capitalization rate:
$325,000 ÷ $5,000,000 = 6.50%
You can repeat this analysis across multiple comparable sales and then consider the differences between those properties and the subject.
For example, a property with longer leases, stronger tenants, better location, newer construction, or less near-term capital exposure might trade at a lower cap rate than an otherwise similar property carrying more risk.
Broker surveys and market reports can provide useful context, but a broad statement that “industrial is trading at a 6% cap” is not enough to value a particular building. Property-level differences matter.
Small changes in the cap rate can create large changes in value
At a $280,000 NOI, the relationship looks like this:
| Cap Rate | Indicated Value |
|---|---|
| 6.00% | $4,666,667 |
| 6.25% | $4,480,000 |
| 6.50% | $4,307,692 |
| 6.75% | $4,148,148 |
| 7.00% | $4,000,000 |
Moving from a 6.50% cap rate to a 6.75% cap rate reduces the indicated value by about $160,000 even though the NOI has not changed.
That is why a valuation should not bury the cap rate inside a spreadsheet. The cap rate is one of the central assumptions in the analysis and should be supported accordingly.
The cap rate is not the discount rate
These two rates are related, but they are not interchangeable.
A capitalization rate converts one measure of annual income into value.
A discount rate is the required rate used to convert a series of future cash flows into present value.
If you expect income to grow over time, the discount rate will normally be higher than the cap rate. The relationship depends on the growth, timing, risk, and other assumptions embedded in the valuation.
When direct capitalization works well
Direct capitalization is particularly useful when the property is reasonably stabilized and a single year’s NOI is representative of the property’s long-term earning power.
It becomes less informative when the property has significant changes ahead.
Consider a multi-tenant office property where half of the leases expire during the next three years. The owner may face downtime, tenant improvements, leasing commissions, free rent, and changes between contract and market rent.
A single stabilized NOI and cap rate compress all of that into two numbers.
You can still use direct capitalization as a benchmark, but a multi-period analysis can tell you much more.
Valuing commercial property with a discounted cash flow analysis
A discounted cash flow analysis, or DCF, explicitly models the timing of the property’s future cash flows.
Instead of assuming one year represents the future indefinitely, you forecast the property over a defined holding period and discount each future cash flow back to its present value.
A commercial real estate DCF may include:
- Contract rent for each tenant
- Scheduled rent increases
- Lease expirations
- Renewal probabilities
- Market rent assumptions
- Downtime
- Free rent
- Tenant improvements
- Leasing commissions
- Expense reimbursements
- Operating expense inflation
- Capital expenditures
- Vacancy and credit loss
- Sale proceeds at the end of the holding period
This makes the DCF especially useful for properties where the timing of lease events materially affects value.
Estimate the terminal value
Most DCF models do not project every year forever.
Instead, the analyst forecasts a defined period, often five or ten years, and estimates the property’s value at the end of that period.
A common technique is to capitalize the NOI expected in the year following the sale:
Terminal Value = Forward NOI ÷ Exit Capitalization Rate
Suppose the property’s projected Year 6 NOI is $335,000 and you assume the property is sold at the end of Year 5 using a 6.75% exit cap rate.
The estimated sale price is:
$335,000 ÷ 6.75% = $4,962,963
If selling costs are 2%, net sale proceeds before debt would be approximately:
$4,962,963 × 98% = $4,863,704
Those proceeds are then discounted back to the valuation date along with the operating cash flows.
Discount the cash flows to present value
Suppose the property produces the following unlevered cash flows after operating expenses, leasing costs, and capital expenditures:
| Year | Property Cash Flow |
|---|---|
| 1 | $250,000 |
| 2 | $275,000 |
| 3 | $240,000 |
| 4 | $300,000 |
| 5 | $320,000 |
Year 3 is lower because a lease expires and the owner must fund downtime and leasing costs before the replacement tenant begins paying rent.
Using a 9% market discount rate, plus the net sale proceeds calculated above, the present value of these cash flows is approximately $4.23 million.
Direct capitalization indicated about $4.31 million. The DCF indicated about $4.23 million.
The difference does not mean one method failed. The DCF explicitly recognized the timing and cost of the upcoming lease rollover, while the direct capitalization method summarized the property using a stabilized annual NOI.
That difference tells you something useful about the property.
Property value should normally be based on property cash flow, not your mortgage
If your objective is to estimate the value of the real estate itself, the DCF is generally performed on an unlevered basis. The property’s cash flows are modeled before mortgage payments.
You can then layer financing onto the acquisition analysis to calculate cash-on-cash return, debt service coverage, levered IRR, equity multiple, and other investor returns.
This keeps two questions separate: what is the property worth, and what return does this financing structure produce for your equity?
Debt can materially change an investor’s return, but financing a property differently does not by itself change the underlying real estate.
Market value and investment value matter here too
A DCF does not automatically produce market value merely because the mathematics are more sophisticated.
If you use market-supported rents, vacancy, leasing assumptions, exit cap rates, and discount rates that reflect the behavior of typical buyers, the analysis can support an opinion of market value.
If you instead use your own business plan and personal 12% return requirement, the result is closer to an investment value to you.
Both analyses can be useful. Just do not confuse the two.
The sales comparison approach
The sales comparison approach asks a straightforward question: What have buyers recently paid for similar properties?
For commercial property, answering that question can be harder than it sounds.
Commercial buildings are less homogeneous than houses. A 40,000-square-foot industrial building in one submarket may differ significantly from another in location, age, clear height, loading, site coverage, condition, tenant profile, remaining lease term, and income.
An appraiser or investor therefore looks for comparable transactions and adjusts for meaningful differences.
Common considerations include:
- Property rights conveyed
- Financing terms
- Conditions of sale
- Date of sale and changes in market conditions
- Location
- Building size
- Age and condition
- Land and building characteristics
- Quality and functionality
- Occupancy
- Lease terms
- Tenant credit
- Rent relative to market
- Near-term rollover or capital requirements
Different property types also use different units of comparison.
An industrial or office building may be discussed in dollars per square foot. Apartments are often compared on a price-per-unit basis. Hotels may use price per room or key. Other property types have their own conventions.
Price per square foot is a benchmark, not a valuation theory
Suppose three reasonably comparable industrial properties sold between $165 and $175 per square foot.
For a 25,000-square-foot subject property, that suggests a broad range of:
25,000 × $165 = $4,125,000
to
25,000 × $175 = $4,375,000
That is useful market evidence, but you should not stop there.
If the $175-per-square-foot sale had a strong tenant with ten years left on its lease while the subject has several near-term expirations, treating the two properties as equivalent would miss an important part of what the buyer actually purchased.
The physical building matters, but so do the leases and cash flows attached to it.
Comparable sales can also support the income approach
A good comparable sale can tell you more than its price per square foot.
If you can establish the property’s NOI at the time of sale, you can calculate its implied cap rate. You can then compare the transaction based on both physical characteristics and investment economics.
That is often more informative than relying on a single metric.
The cost approach
The cost approach estimates value based on what it would cost to create the property today.
In simplified form:
Property Value = Land Value + Cost of Improvements New − Depreciation
The improvement cost may include direct construction costs, indirect costs, and an appropriate allowance for entrepreneurial incentive or profit where applicable.
From there, the analysis accounts for losses in value from depreciation and obsolescence. These can include:
- Physical deterioration, such as wear, age, or deferred maintenance.
- Functional obsolescence, where the building’s design or features no longer meet current market preferences.
- External obsolescence, where factors outside the property reduce its value, such as adverse market conditions or surrounding land uses.
When the cost approach is most useful
The cost approach can be particularly useful for newer buildings because there is less accumulated depreciation to estimate.
It can also matter for special-purpose properties that rarely sell and may not have a conventional rental market.
For an older income property, the cost approach can become less persuasive. Construction cost does not determine how much investors will pay for a property if the completed improvements cannot generate enough income to justify that cost.
Cost and value are not the same thing. A building can cost $10 million to reproduce and still be worth less than $10 million if buyers do not believe its economic benefits justify that price.
Reconcile the valuation methods instead of averaging them
After developing one or more approaches to value, the final step is reconciliation.
Reconciliation does not mean calculating three values and taking the average.
Suppose your analysis produces:
| Method | Indicated Value |
|---|---|
| Direct Capitalization | $4.31 million |
| Discounted Cash Flow | $4.23 million |
| Sales Comparison | $4.13 to $4.38 million |
| Cost Approach | $4.50 million |
Simply averaging these numbers ignores why they are different.
Instead, ask what each method is telling you.
The direct capitalization analysis says the property’s stabilized income supports a value around $4.31 million.
The DCF is somewhat lower because it captures near-term lease rollover and the cash required to re-lease the space.
Comparable sales support values in roughly the same range.
The cost approach is higher, but if buyers of existing industrial properties in this market are primarily pricing assets based on income and comparable transactions, replacement cost may deserve less weight.
A reasonable conclusion might therefore be around $4.25 million.
The point is not the exact answer in this hypothetical example. The important part is the reasoning.
A valuation becomes more defensible when you can explain why the indications differ and why the strongest evidence deserves the most weight.
A worked commercial property valuation example
Let’s put the pieces together using the same hypothetical 25,000-square-foot multi-tenant industrial property.
Step 1: Estimate stabilized NOI
After reviewing the rent roll, leases, historical expenses, and market data, we develop the following stabilized operating statement:
| Item | Annual Amount |
|---|---|
| Base rent, reimbursements, and other potential income | $475,000 |
| Vacancy and credit loss | ($25,000) |
| Effective gross income | $450,000 |
| Operating expenses | ($170,000) |
| Net operating income | $280,000 |
This is the first major judgment in the valuation.
We are not simply taking the seller’s most recent NOI. We are estimating the property’s sustainable operating income based on the leases, market conditions, and normal operating expenses.
Step 2: Apply direct capitalization
Comparable investment sales suggest an appropriate cap rate near 6.50%.
That gives us:
$280,000 ÷ 6.50% = $4,307,692
The direct capitalization indication is approximately $4.31 million.
Step 3: Model the lease rollover
The rent roll shows that several leases expire during the next few years.
When we explicitly model those expirations, along with downtime, tenant improvements, leasing commissions, new rent, and operating expenses, the property’s annual unlevered cash flow becomes uneven:
| Year | Property Cash Flow |
|---|---|
| 1 | $250,000 |
| 2 | $275,000 |
| 3 | $240,000 |
| 4 | $300,000 |
| 5 | $320,000 |
The lower Year 3 cash flow reflects the cost of replacing an expiring tenant.
Step 4: Estimate the resale value
We estimate Year 6 NOI at $335,000 and use a 6.75% exit cap rate:
$335,000 ÷ 6.75% = $4,962,963
After 2% selling costs, expected net sale proceeds are approximately $4.86 million.
Step 5: Discount the future cash flows
Discounting the five years of property cash flow and the expected sale proceeds at a 9% market discount rate produces a value of approximately $4.23 million.
Now we understand why the DCF is lower than the direct capitalization result. The DCF does not hide the near-term leasing costs inside a stabilized number.
Step 6: Review comparable sales
Recent transactions for reasonably comparable industrial properties indicate roughly $165 to $175 per square foot.
Applied to the 25,000-square-foot subject, this implies:
$4.13 million to $4.38 million
The comparable sales therefore provide independent market support for the income indications.
Step 7: Consider the cost approach
Assume the cost approach produces an indication around $4.50 million.
That is useful evidence, but the property is an existing income-producing investment and the available transaction data suggest buyers are primarily pricing these assets based on income and comparable sales.
We would therefore give the income and sales evidence more consideration.
Step 8: Reach a conclusion
Taken together, the evidence supports a market value around $4.25 million.
An investor can now move to the next question.
At a $4.25 million acquisition price, with the proposed loan and business plan, does the investment produce an acceptable return?
That is an underwriting decision rather than a pure property valuation question.
How changes in NOI affect commercial property value
One of the most useful features of the income approach is that it shows how operating decisions can translate into value.
At a 6.50% cap rate, every additional $10,000 of stabilized NOI supports approximately:
$10,000 ÷ 6.50% = $153,846
of additional property value.
That does not mean every $10,000 increase automatically creates $153,846 of value. The additional NOI needs to be sustainable and something a buyer will capitalize.
But it explains why commercial owners focus so closely on rent, occupancy, expense recoveries, operating expenses, and other recurring components of NOI.
A permanent $50,000 increase in stabilized NOI, for example, would support approximately $769,000 of additional value at a 6.50% cap rate.
This also explains why it is dangerous to treat every short-term increase in NOI as permanent. If the income disappears next year, capitalizing it forever will overstate value.
Common mistakes when valuing commercial property
Capitalizing the seller’s NOI without rebuilding it
A seller’s operating statement is a starting point, not the conclusion.
Review the leases, vacancy, reimbursements, expenses, and market conditions yourself. A property’s reported NOI can contain temporary conditions that a buyer should not capitalize into perpetuity.
Using the wrong cap rate for the NOI
Make sure your NOI and comparable cap rates are calculated on a consistent basis.
If your NOI includes or excludes items differently from the comparable sales used to derive the cap rate, the resulting value can be misleading even though the formula itself is correct.
Treating all commercial square footage as interchangeable
Price per square foot is useful, but commercial buyers purchase economic interests, not identical boxes.
Location, building quality, lease structure, rent levels, tenancy, and remaining lease term can create meaningful differences between otherwise similar buildings.
Ignoring lease expiration dates
A property with five years of stable NOI is different from one where half the rent roll expires next year.
Near-term rollover can produce vacancy, free rent, tenant improvements, leasing commissions, and changes in rental rates. A DCF makes these timing differences visible.
Including debt service in NOI
Mortgage payments affect the investor’s equity cash flow, not the property’s NOI.
Keep property valuation separate from financing analysis if you want to understand what the real estate itself is worth.
Choosing a cap rate or discount rate because it produces the desired value
The rate should come from the market and the risk of the cash flows.
Working backward from the seller’s asking price or your desired purchase price defeats the purpose of the valuation.
Assuming the exit cap rate should equal the going-in cap rate
The exit cap rate is an assumption about the market in the future.
The property will also be older, its lease profile may be different, and capital market conditions may change. It is common to test an exit cap rate at or above the going-in rate as a conservative underwriting convention, but the assumption should still be considered in the context of the property and expected market conditions.
Reporting a value with more precision than the analysis supports
A DCF may calculate a value of $4,227,723.13.
That does not mean anyone knows the property’s value to the penny.
Valuation is an estimate based on market evidence and assumptions. Use enough numerical precision to check the analysis, then round the conclusion to a level that makes sense.
How appraisers, buyers, and lenders use valuation differently
These parties may analyze the same property but ask different questions.
An appraiser develops an independent opinion of value for a defined property interest, intended use, and effective date.
A buyer typically goes further. The buyer may estimate market value, then build an acquisition model using a specific business plan, financing structure, and required return.
A lender cares about collateral value but also needs to know whether the property’s cash flow can support the proposed debt.
These analyses overlap, but they are not interchangeable.
That distinction becomes especially important when a buyer says, “The property is not worth $5 million because my IRR is only 9% at that price.”
What the buyer has really established is that the property may not be worth $5 million to that investor under those assumptions. The broader market could still support a $5 million market value.
Frequently asked questions about commercial property valuation
How do you calculate the value of a commercial property?
There is no single formula that works for every commercial property.
The three primary valuation approaches are the income capitalization approach, sales comparison approach, and cost approach.
For a stabilized income-producing property, a common starting point is:
Value = Stabilized NOI ÷ Market Cap Rate
More complicated income properties often require a discounted cash flow analysis as well.
What is the most common way to value commercial real estate?
For properties purchased primarily for their income, the income capitalization approach is often central to the analysis.
The sales comparison approach can provide important market evidence, while the cost approach may be more or less relevant depending on the age and type of property.
The appropriate emphasis ultimately depends on how market participants price that particular type of real estate and on the quality of the available data.
Can you value commercial property using price per square foot?
Yes, but price per square foot is usually better viewed as a unit of comparison than as a complete valuation method.
A 20,000-square-foot building that sells for $4 million sold for $200 per square foot. That information becomes useful when compared with genuinely similar transactions.
It does not tell you whether another 20,000-square-foot building is also worth $4 million unless you account for the differences between the properties.
What is the difference between a cap rate and a discount rate?
A cap rate converts a single measure of annual income into value.
A discount rate converts a series of future cash flows into their present value.
They measure related concepts but are not the same rate.
Should mortgage payments be included when valuing commercial property?
Not when you are valuing the property itself using NOI or an unlevered DCF.
Debt service belongs below the property-level cash flow and is used to calculate returns to the equity investor.
How do you value a vacant commercial property?
A vacant property may require several methods.
You might estimate the income it could produce after lease-up, including the time and cost necessary to reach stabilized occupancy. Comparable sales may also become more important, particularly when other vacant or owner-user properties have traded recently.
The cost approach can provide additional information for newer or specialized buildings.
Simply applying a stabilized cap rate to hypothetical full-occupancy NOI without accounting for the cost and time required to get there would normally overstate current value.
How do you value an owner-occupied commercial property?
The sales comparison and cost approaches can become more important because there may be no existing arm’s-length rental income to capitalize.
An income approach may still be developed using market rent, depending on the property and purpose of the analysis.
Does a higher cap rate mean a lower property value?
Yes, if NOI remains unchanged.
Because Value = NOI ÷ Cap Rate, a higher cap rate produces a lower indicated value, while a lower cap rate produces a higher indicated value.
This is why changes in required market returns can cause commercial property values to move even when the property’s current NOI has not changed.
Is an appraisal the same as an investment analysis?
No.
An appraisal may be used to develop an opinion of market value. An investment analysis asks whether the property makes financial sense for a particular investor, typically after considering the acquisition price, financing, business plan, sale assumptions, and required return.
A disciplined acquisition process usually needs both perspectives.
Bringing the valuation together
Commercial property valuation is not difficult because the formulas are complicated. Most of the formulas are simple.
The difficult part is deciding what numbers belong in them.
You need to understand the leases, normalize the property cash flow, distinguish temporary conditions from sustainable income, study comparable transactions, and use capitalization and discount rates that are consistent with the market and the risks of the property.
For a simple stabilized property, direct capitalization may tell most of the story.
When leases expire, rents change, space turns over, or large capital and leasing costs occur at different points in time, a DCF becomes much more useful.
The sales comparison and cost approaches then give you additional ways to test whether the income analysis makes sense.
The result should not simply be a number. You should be able to explain where the value came from, which assumptions matter most, and what would have to change for your conclusion to change.
That is what makes a commercial property valuation useful when it is time to make an actual investment decision.
Related valuation guides
For more detail on the individual pieces of the analysis, explore these guides: