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Commercial Real Estate News
Commercial Real Estate Appraisers / Consultants Warren K. Hoppke, SRPA
Robert Nord, MAI
Southern California Appraisal Services for Over 30 Years
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Commercial Real Estate and Capitalization Rates
In the appraisal of commercial real estate many investors ask the question, " What’s in a capitalization rate "
A cap rate consists of the expected rate of inflation, plus the real rate of return (10yr. Treasury bond is considered the risk free basic rate) plus a risk premium minus the NOI growth rate.
The spread between real estate cap rates (NCREIF Cap Rate) and the 10-year Treasury has generally varied between 100 and 450 basis points since 1992. The risk premium spread for investment grade properties in 2004-05 have ranged from 3.5% to 4.5%, but are expected to slowly decline in the near future as large amounts of capital compete for a limited supply of investment grade properties. NOI growth rates are expected to increase from 1.0% to 2.0% on average. Poor performance on alternative investments (primarily the stock market) is one of the reasons cited for declining risk premiums as massive amounts capital flow into commercial real estate. Moreover, South American and European investors are also flocking to U.S. commercial real estate because of the low real rates of return in their own countries. In addition, the prospects for a weakening dollar over the next several years has introduced another element in european investors yield expectations. Some european investors have introduced currency expectations into their spread sheets and have out bid american investors on several investment grade properties.
According to Korpacz commercial Real Estate Investor Survey, national unleveraged cap rates on apartments ranged from 5.0% to 9.25% and averaged 7.01% for the 4th quarter of 2004 and were down slightly from the 3rd quarter. Commercial real estate as follows; Shopping center cap rates were about the same 5.5% to 9.5% with an average of 7.4%. Office and industrial warehouse cap rates were higher averaging 8.4% and 8.12% respectively. This is to be expected, especially in many national office markets where vacancy rates are just now slowly starting to decline. Cap rates for apartments should trend toward 7% or lower and remain constant for the next serveral years, notwithstanding any anomalies in interest rates and assuming rental rates continued to increase.
Appraisal & Lease Analysis California Commercial Real Estate
Analyzing commercial real estate leases takes time and expertise. Purchasing California commercial real property without analyzing each lease can have a profound impact on your properties bottom line (net income) and market value. In the linked article on Triple Net Leases , the author explains common mistakes investors, owners, real estate brokers and agents make when buying or selling a commercial property. Determining if the lease is a true triple net lease, bond lease, modified net lease, gross lease, modified gross lease, net net lease, net lease or other hybrid type of lease is the job of a Certified General Appraiser licensed with the Office of Real Estate Appraisers (OREA) in the State of California.
Additionally, a Certified General Real Estate Appraiser will look at the escalation clause in each lease and the method used to determine rental increases over the term of the lease. In the article Leasing Lessons the aurthor analyzes several different methods used in determining rental increases as it relates to commercial real estate and how to maximize return on investment.
Moreover, each clause in every commercial lease must be carefully reviewed to determine the potential affect it could have on a properties potential market value. The one person we believe that is best suited to review commercial real estate leases is a professional Certified General Real Estate Appraiser.
Our focus is on commercial, industrial, apartment buildings, residential vacant land, single family residences, ranch & ocean front property, luxury estate homes, mansions, acreage with entitlements, restaurants, shopping center, fast food restaurant, office building, R & D industrial, automotive centers, gas stations, church, medical building, storage facilities, motel and hotel, subdivsions and proposed construction, and special use properties.
Our appraisers have a wide range of experience in numerous geographical areas throughout the state. The types of real estate appraisals we can provide include:
California Commercial Real Estate Appraisers
IRS 706 & 709 Valuations
Mark to Market
Mortgage Loan, Sale, Purchase Transactions
Estate Tax & Trust
Insurance Claims - Fire & Flood Damage, Landslide, Geologicial Issues
Expert Witness Testimony & Litigation Support
Real Estate Damages | Diminution in Value
South County Real Estate Appraisers Commercial
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Office of Real Estate Appraisers - State Certified Commercial Appraiser
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