When it comes to commercial real estate, people often seek our opinion on the value of their assets. From a rough estimate to a certified appraisal, we are well-versed in providing this information. Appraisals are necessary for financing purposes or in the unfortunate event of a title holder’s passing, requiring a “time of death” appraisal. As real estate brokers, we have a close relationship with appraisers since we often share key data, such as lease comps, which they use in their work.
However, today, I want to focus on a different aspect of valuation known as a “broker opinion of value.” This is a smaller and more informal assessment compared to a full appraisal. My insights are based on a recent conversation I had.
Here are the details of one such assignment we were given: A local property owner engaged us to provide a broker opinion of value for a property they purchased in 1997. Originally used for their operating company, they now wanted to determine the property’s value for internal purposes.
Here’s a description of the property: It comprises approximately 100,000 square feet of warehouse space suitable for manufacturing and distribution. The property boasts ground-level and dock-high loading doors, as well as a 24-foot minimum warehouse ceiling clearance – ideal for storing and handling large inventory or equipment. With 1,200 amps of power and around 200 parking spaces, the property can accommodate various industrial manufacturing uses. It also features a fenced yard for added security, staging, and storage. Its prime location offers easy access to both Los Angeles and Orange counties.
To estimate the value of the property accurately, we applied our in-depth knowledge of the Orange County California sub-market, which we have developed since starting our career in 1984. Our team specializes in the industrial sector of commercial real estate and has been involved in numerous leasing and selling transactions for different investors and owner-occupants. We consider ourselves market experts in this asset class.
In order to determine an accurate estimation, we analyzed four specific market segments: comparable sales, comparable leases, available sales, and available leases. We compared our client’s property to similar buildings in terms of amenities and only considered transactions that met specific criteria.
We also took into account the preferences of potential buyers or tenants who would be interested in leasing or purchasing the property. In addition, we examined general economic trends and how they might impact industrial property values.
Here’s an overview of the comparable sales and availabilities we considered: For comparison, we surveyed properties ranging from 75,000 to 125,000 square feet across six cities. This search led us to four properties with square footage ranging from 76,232 to 123,650. The pricing varied from $295 to $316 per square foot. However, it’s worth noting that the $316 comp occurred before the interest rates rose and slowed down sales volume. Two of the buildings were bought by occupants, while the other two were purchased by investors.
In terms of potential tenants or purchasers, our client’s property would appeal to logistics providers and light manufacturing companies. Logistics providers require specific amenities such as dock-high loading, adequate sprinklers for storage, and enough space for 53-foot trailers. Unfortunately, our client’s property lacks certain modern logistics requirements. On the other hand, a light manufacturing operation would need heavy power, sufficient office space, and a secured yard area for storage and staging – all of which our client’s property offers.
There are also private investors in the market actively seeking quality industrial investments. These investors primarily focus on returns on their capital. Currently, returns range from 5.5% to 6.5% for all cash purchasers. If an investor needs financing, the capitalization rate would need to be higher than their financing cost – typically in the range of 7.5% to 8%. Recent sales activity in Southern California has decreased compared to the peak years of 2021 and 2022, where institutional buyers were more active.
In our analysis, we take into account market conditions, including total square footage of the market, vacancy rates, and economic factors such as interest rates, global events, elections, and recession concerns.
In this particular case, we had to consider special circumstances. The owners had been operating from this location since 1997 and rented the property to their operating company at a rate below market value. This rental subsidy created an inflated estimate of the company’s earnings before interest, depreciation, and amortization (EBIDA), therefore understating the property’s value based on market rent.
Based on our assessment, we believe the property would be most valuable to an owner-occupant, followed by a private investor. However, developers seeking to demolish the building and pursue alternative uses would likely have little interest.
In our report to the owner, we provided value estimates for purchase by an occupant, lessee, or investor. However, it’s important to note that our opinion is not an appraisal but rather a broker opinion of value. Some parts of our opinion could be used to form an appraisal.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. You can reach him at [email protected] or 714.564.7104.
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