How is the value of commercial real estate typically assessed?

The value of commercial real estate is typically assessed using the Income Approach, which is grounded in the property’s revenue generation potential. This method considers the income that the property can generate, typically through leasing. Assessors look at the rental income, operating expenses, and potential market rents to estimate the net operating income (NOI). They then capitalize this income using an appropriate capitalization rate, reflecting the risk and return expectations of investors in the market for similar properties.

In commercial real estate, the Income Approach is particularly relevant as it reflects the actual economic performance of the property rather than merely the cost to construct it or the sales prices of comparable properties, which may not accurately capture the unique characteristics influencing value in the commercial sector.