How would you determine the value of a longtime vacant warehouse?

Question

I’m looking at purchasing an 18,000 sq ft warehouse that’s been vacant for quite some time.

I’m having trouble evaluating the price they’re asking since I have no recent comparables to determine the NOI since the property’s been vacant for years.

I’m also unfamiliar with the industrial property class which adds to my difficulty.

Is there anyone out there who understnds warehouses and knows how to evaluate vacant ones?

Zack S. · Answer

@Rafael Weiss send me the deal and I’ll give you an opinion. I invest in industrial warehouse properties in Orlando. I just bought a vaccant one in an opportunity zone, zip code 32805. We aren’t acquiring right now (enough on our plate) and I wouldn’t steal a deal from someone...if that’s a concern of yours.

Bill B. · Answer

Dont forget, I’m pretty sure you have spend more on improvements than the purchase price to qualify for Ozone benefits.

Rafael W. · Answer

@Scott Mac have you done a lot of industrial deals before?

Rafael W. · Answer

@Cason Acor Thanks for the thorough response, it is my first industrial deal, this is only because I NEED to invest in Opportunity Zones due to missing my 1031 window. I'll think about sending you a message.

Nathan Alex · Answer

@Rafael Weiss Great

Scott Mac · Answer

Hi Rafael,

You might want to ask about any past Eviro-Phase 1 Brownfield check results, before getting too far into this financially.

Good Luck!

Cameron Chester · Answer

@Cason Acor and others’ advice is right on—I would definitely recommend getting help from a broker with industrial property expertise in your market. Assuming you don’t plan to owner occupy the property, buying vacant property as an investor carries risk and is quite speculative. A broker will be able to provide you with a better idea of the value and leasing potential for the building, especially if industrial property is unfamiliar to you right now.

To estimate the value of a vacant commercial property, first get an idea of the value if it was leased and stabilized. Then deduct all of the costs required to execute your business plan and get a tenant in there. This requires some creativity and answering the question: why is this property vacant? Once you have figured that out, things to deduct from the stabilized value include repairs to the building, holding costs, brokerage commissions, rent concessions, etc. Include profit too – you shouldn’t be working on the deal/taking on the risk for free!

I agree with @Dushyant Ravi that using other vacant property sales comps is useful too. Because each vacant property could have differences that are difficult to adjust for, I view vacant sale comps as a secondary check on the value derived from the method I first described.

Without knowing any specifics about the property, these are some of the general questions I would try to answer in order to estimate the value of the property:

• Why is the property vacant? Does it suffer from functional/external obsolescence? Can the obsolescence or physical deterioration be reasonably cured? Since it is vacant and has been for some time, the market is essentially saying “there currently isn’t demand for the building as-is/at this price". 
• Is the current improvement the highest & best use? What is the land value?
• How much is it going to cost to re-tenant (property improvements, holding costs, taxes, potential rent concessions, TI allowances, permit fees, architect/engineering, etc.)?
• What is the market rent for the space? (Used for stabilized value)
• What cap rates are similar occupied properties trading at? (Used for stabilized value)

Dushyant Ravi · Answer

A broker should be able to show you "dark trades" so that you can see what a empty or empty-ish building is trading in your market. I often use RCA to find comps and you can tell when a comp is a dark trade.

Cason Acor · Answer

@Rafael Weiss I agree with what’s been said above. Where the building doesn’t have a current income stream, a commercial broker will come in handy because they can help you determine replacement costs, sales and rent comps, cap rates, etc to properly determine the value of the building. You also want to consider why the building has been vacant for so long. Especially where this sounds like your first industrial deal, I would highly recommend working with a commercial broker.

Full disclosure, I’m a commercial real estate agent and I work solely with industrial buildings all over the country. Shoot me a direct message and I’d be happy to answer anymore questions or help you underwrite the building to get a fair price. I know a lot of people on BiggerPockets are fans of working off market and avoiding agents, but a good agent will go to battle for you and give you a big advantage in negotiations, especially if you don’t have industrial investment experience. You don’t want these sellers to take advantage of you. Like I said, shoot me a message and I’d be happy to help and answer questions.

Nick Rutkowski · Answer

@Rafael Weiss

Call up your local commercial realtor and ask them if they could help you in the transaction. They might have current cap rates for your area and proper due diligence helps if you don't know too much. You could use the tax assessment as a rough guide. I mean, if its abandoned it could just be worth the land it's on.