Appraising Industrial Property: Three Adjustments and Why They’re Made

San-Diego-Industrial-Appraiser

When appraising commercial real estate, appraisers make adjustments to comparables based on a variety of factors, including location, size, and age/condition. That said, additional adjustment factors need to be considered for industrial properties beyond what is typical for other types of commercial real estate. Here are three adjustments that should be considered when appraising industrial properties and why they should be made.

Building to Land Ratio

This adjustment, also known as a floor area ratio (FAR) adjustment, considers the ratio of building area to land area. For example, if the subject property consists of a 1,000 square foot building on a 4,000 square foot lot, then the property has an FAR of 0.25. For industrial property appraisals, this is an important adjustment to consider because some properties have a smaller FAR than what is typical and thus, more value can be attributed to the land (for example, a contractor’s storage yard typically has a small improvement and a large lot area, which equates to a lower ratio). When choosing industrial comparables, it is best to select sales and leases with a similar floor area ratio as the subject.

Office Build Out

Another adjustment to consider when appraising industrial properties is the amount of office space the building has. Properties such as flex buildings or research and development (R&D) buildings have a high percentage of build out compared to other types of industrial properties such as storage warehouses. Generally, an industrial property with a higher percentage of office space commands a premium due to the cost to install the improvements (this is why medical office space tends to sell for a higher price than general office space). As with floor area ratios, it is best to select comparables with a similar amount of build out. It is also best to not compare different types of industrial properties (e.g. an R&D property with lab space to a warehouse property).

Clear Height/Loading

A third adjustment to consider is the subject property’s clear height and number of loading doors (both grade-level doors and dock-high doors). These physical characteristics are essential for industrial uses such as distribution and storage, so an adjustment for these may be necessary. For example, if the subject property being appraised has 15 feet of clear height, but comparable properties typically have 20 feet of clear height, then an adjustment would need to be made to the comparables.

Summary

The above adjustment factors are a sample of items that should be considered in the valuation of an industrial property. That said, the market may not show any significant difference with some of these factors. For example, there may not be a significant difference in price between a property with 4 loading doors and one with 5 loading doors. In addition to reviewing sale and lease data, it is also critical to interview industrial market participants (buyers, sellers, brokers, etc.) to determine what influences value. This combined with good comparable data will lead to an accurate appraisal.

If you have any additional questions about the appraisal of industrial properties, or if you are in need of an industrial appraisal, please contact us today.

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