What are commercial real estate comps?
Commercial real estate comps or comparables provide data that can help investors, brokers, and other real estate professionals compare a property’s value with that of similar properties. Comps can help sellers arrive at a fair listing price that will help close the deal quickly. On the other side of the transaction, commercial real estate comps can assure buyers that they are not overpaying.
Commercial real estate comparables vs residential
It is essential to distinguish commercial and residential real estate comparables. The prime driver of a commercial property’s value is its net operating income. On the other hand, the price of residential real estate is usually based on its location and square footage. You need to keep that in mind when deciding which comps to use for a particular property.
Essential data for commercial lease comparables
Commercial real estate comps fall into two categories: sales comps and lease comps. The attributes you need to consider when choosing comps differ for each. When you are looking for commercial lease comps, keep an eye out for rental properties with the following characteristics:
- Similar in size
- A comparable lease structure and rental rates
- The same type of quality and physical condition
- Broadly similar categories of tenants
Finally, the commercial lease comps you consider should be for property used for the same purpose. Hence, multifamily units can be compared with multifamily units, offices with offices, etc.
Essential data for commercial sales comparables
When buying or selling a property, you must consider sales comps, not commercial lease comps. The important data for sales comps are:
- When was the property sold? Remember that data for old sales transactions may be irrelevant today.
- Location.
- Building-level data. Pay special attention to the layout of the property.
- Year of construction.
It is advisable to look beyond the numbers. For example, you may want to find out if a particular property was sold in a hurry because the seller needed funds urgently. If that happens, the selling price may not provide the correct picture of the property’s value.
The following table compares the important attributes of commercial real estate lease comps with commercial real estate sales comps:
| Commercial real estate lease comps | Commercial real estate sales comps |
| Size of the property | Date of sale of the property. Old commercial property data may not be relevant. |
| Lease structure and rental rates | Location |
| Quality of construction and physical condition of the property | Building-level data |
| Type of tenants | Year of construction |
| What the property is used for | Was it a fire sale? |
Who uses commercial real estate comps?
A wide range of real estate professionals use commercial comps. The following list provides brief details of the primary users:
- Appraisers: Commercial comps help appraisers determine the correct value for the property they are appraising.
- Lenders: Mortgage lenders use comps as well as property appraisals to decide upon the loan amount they are willing to advance to a borrower.
- Property Buyers: Commercial comps provide buyers with data they can use to ascertain if they are paying the right price for a property.
- Property Sellers: Sellers need to familiarize themselves with the relevant sales comps in their vicinity. This information can assist them in negotiating a better deal and help ensure they do not leave money on the table.
How are real estate comparables determined?
There are many ways to obtain the correct type of commercial comp data. However, it is equally easy to fall into the trap of using inappropriate or outdated numbers. This section of the post addresses the sources you can use to select the commercial real estate comps that directly affect your property.
Commercial property sales history
A property’s sales history is an excellent place to start your search. The information you can gather from public records includes transaction data, ownership data, and mortgage details.
Recently sold commercial properties
How much did similar properties sell for in the immediate area? Collecting this information is crucial. You should put in the effort and thoroughly investigate the sale. The information that you collect should include:
- Date of sale
- Sale price, including price per square foot
- Type of property
- Net operating income
- Buyer’s name
- Seller’s name
Property location
A commercial property’s location is a critical factor in determining its value. Therefore, you should ensure that the comps you select are in the same area or at least in a similar location. You may think you have found the perfect comp, but first, check if you are comparing apples with apples.
Building-level data
It is crucial to consider the physical attributes of the building as well as its condition. Comps should be as similar in age and size as possible.
How to find commercial real estate comps?
Here are some specific sources for finding real estate comps.
- Land comps: Comping land can be challenging as vacant land may not generate income. Hence, following a traditional approach where the lease structure and rentals are considered to identify comparable properties may not be possible. In this situation, it would be best to compare the property with other similar plots of vacant land.
- Comps by zip code: Looking for comps within the same zip code is a good idea. This could help identify high-quality comps. Commercial comps from the same zip code will likely be more accurate than comps of properties from far away.
- Find comps by sales history: The sales history for a property is possibly the most precise source for a comp. Just bear in mind that you need to consider the timing of the sale. Historical data from many years ago may not give you an idea of the current market value. Additionally, remember to look at the trend in prices over the years.
Tips for finding commercial real estate comps
Here are some specific action points that could help buyers, sellers, and brokers find reliable comp data:
Leverage an online marketplace for CRE
Start your search for commercial real estate comps using an online marketplace. LoopNet lists a large number of commercial properties for sale and lease, and you can use several filters to narrow down your search. Moody’s Analytics Catylist, a listing platform, could be a valuable resource for CRE brokers.
Work with commercial real estate brokers
Brokers can be ideal sources for commercial comps. They have an ear to the ground, and you could pick up some useful details from a brief conversation. Remember that when you talk to brokers, they can expect information in return. Hence, it is advisable to be prepared for some quid pro quo.
Work with local commercial property appraisers
Who better to ask for commercial property comps than the people who are responsible for appraising commercial properties? Experienced appraisers would have a depth of knowledge that would be hard to replicate, especially if they are from the immediate area.
Look at tax records
Public tax records can be another good source of commercial real estate comp data. Examine the county’s property records for recent transactions.
Find a reliable source of information for your comps
Keep the big picture in mind when looking for comps. The properties you select should be of the same type and condition and preferably in the same location.
Use a tool with the right filters
There are several online tools to help you find comps. But you must ensure you choose one with the appropriate filters. Here are some filters that you should look for in the comps tool you are considering:
- Property type
- Property size
- Area
- Year of construction
- Sales history
- Location
Find price per square foot
If most of the critical parameters match, it could be a good idea to compare the square footage of the comps. Price per square foot is calculated by dividing the property value by the property size.
Calculate the price per unit
You can also calculate the price per unit. However, this calculation should only be used when comparing properties containing similar units.
Challenges in finding commercial real estate comps
Finding high-quality comps can be difficult. Here is a list of the biggest challenges you could face and how you can overcome them:
Old transaction data
If the comp is several years old, it can be useless. Try to collect recent commercial property data. Ideally, the comp should be six months old or less.
What if you can’t find anything within that time frame?
Widen your geographical search or look for properties that match at least some of the parameters you are looking for.
Disparate income streams
Consider a situation where you find a comp in the area you are looking at. The transaction occurred a month ago, and the property is similar in every critical respect-a perfect comp!
But wait.
Does it generate a similar income stream? One building may have high vacancies, and the owner may have sold at a lower-than-market rate. The upshot is that you need to consider every possible factor before identifying a comp.
How many comps to use
It may seem reasonable to think that a higher number of comps would be preferable. After all, more comps would allow you to reach a more meaningful average value. However, collecting a large number of comps may not be the best approach. Instead of quantity, aim for quality. Spending time and effort and collecting a few high-quality comps is preferable. Three to six comps is a good number to aim for.
The bottom line
Comparables are not intended to provide a valuation of your property. Instead, they are tools that help with valuation. Use comps to arrive at a more accurate and informed assessment of your property’s value instead of a process that provides you with a valuation figure.
