How much does commercial real estate appreciate?

Question

I've been noticing lately that commercial real estate can appreciate much faster than residential. Sometimes it's between 23-30% per year, and possibly more in some locations. Is this normal market behavior?

Account Closed · Answer

When working with a commercial developer our goal was to negotiate contracts with vendors to cut expenses, constantly negotiate leases to make sure we were always at the top of market rent, and keep up on maintenance to cut down on unnecessary expenses on the property. The goal at the end of the day is to make your properties NOI as high as possible and keep the property in the best condition to have the lowest CAP rate in the going area. This helps the property appreciate as fast as possible. For increases of 20-30% that would have to be the purchase value add properties where owners had let the property go and did not tend to the leases or the current tenants.

Mike Dymski · Answer

A 25-30% increase in NOI and market value would be a very successful value add in commercial.

The power in commercial real estate is not the % increase, its the $ increase (i.e. scale).  $800/mo increased by 20% is a lot different than $80,000/mo increased by 10%.

Patrick Philip · Answer

The rents weren't raised.

But doesn't every building sit on land?

Sam Shueh · Answer

I suspect Mr T is buy and hold or zoning type. He is in a different league I don't pay much attention see how he did it. Good for him.

Ronald Rohde · Answer

You're making unwarranted assumptions. "forced appreciation" happens over a long time period, especially with longer leases. You raise rents every opportunity and that counts as your work.

Did your dad ever raise rents? For a lot of trailer parks, the land value has appreciated more than the income. You're mixing different methods of valuation.

Patrick Philip · Answer

The inspiration for this post was an interview I watched of Donald Trump from 1987. He was asked if he preferred the real estate business or the casino business. He replied saying that they were entirely different businesses and that casinos were for cash flow and real estate was for appreciation. Now I'm pretty sure Trump is/was mainly a buy-and-hold investor because I remember hearing that he instructed his kids to do that when they started running parts of his business. So I don't think his main plan was to force appreciation for 3-7 years, then sell after the NOI was maximized.

Is it possible that super expensive real estate like the kind Trump might buy does appreciate that much just by the market without forcing any improvements in NOI?

Also, my dad bought a trailer park in April 2015 for $175,000. He listed it for sale 3 years later and the broker suggested a price of $300,000. There was no improvement in NOI during this time. This is 23.8% appreciation with no improvements.

And we all know that even simple SFH residential real estate appreciates (or depreciates) with the market even when no changes have been made to the house (aside from it grower older with time).

Alina Trigub · Answer

@Patrick Philip As mentioned by @Jason DiClemente commercial properties are valued based on Net Operating Income (NOI). In order to increase NOI, you have to look at your potential purchase from two sides:

I. income - can it be increased (via either rent increase, or other types of income - for instance, laundry or covered parking if there's none and it makes sense to add it)

and/or

II. expenses - can it be decreased. If current expenses for the property for instance 65%, can you lower it to 55% or less. Look at each expense individually and decide what can or cannot be done. For instance, if the current owner is paying the water bill and the MFH property is submetered, maybe it makes sense to put the water bill back on the tenants (except for the common areas). I hope this helps.

Good luck!

Patrick Philip · Answer

Can you elaborate?

How much does commercial real estate appreciate?

Most Popular Reply