Understanding Commercial Real Estate Values
Transcript of Understanding Commercial Real Estate Values
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Understanding Commercial Real Estate Values
Courtesy of KBS Capital Markets Group
Valid for 1 hour of CFP CE Credit
FOR BROKER DEALER USE ONLY
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For Broker Dealer Use Only
Today’s Topics
1. “Cap” Rates 101 2. Net Operating Income (NOI) Property Selection Active Asset Management
Understanding Commercial Real Estate Values
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What impacts Commercial Real Estate values?
Unlike residential, commercial real estate is valued on its income stream.
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CAP RATES NET OPERATING INCOME
Revenues -
Operating Expenses
Net Operating Income ÷
Purchase Price
EXTERNAL FACTOR INTERNAL FACTOR
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Cap Rates 101
For Broker Dealer Use Only
EXTERNAL FACTOR
Capitalization (Cap) Rates: Expected return on an investment based on the perceived risk of a specific asset or market sector
Approximate value = NOI / cap rate
$1 $20 = 5% Cap Rate $1
$10 = 10% Cap Rate
$20 $18 $16 $14 $12 $10
5% 5.5% 6.25% 7.14% 8.33% 10%
PURCHASE PRICE
CAP RATE
PURCHASE PRICE
CAP RATE
Cap Rate = NOI / Purchase Price
As cap rates rise, purchase prices for property decrease
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For Broker Dealer Use Only
Source: Marcus & Millichap Research Services, CoStar Group, Inc., RCA
Commercial Property Cap Rate Trends
Cap Rates 101
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Scenario 1: Cap Rate Movement, NOI Static
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$1M
.05 = = $20,000,000 NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
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Scenario 2: NOI Movement, Cap Rates Static
For Broker Dealer Use Only
= = $15,000,000 $1.5M
.10
NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
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Scenario 3: Cap Rate & NOI Movement
For Broker Dealer Use Only
= = $30,000,000 $1.5M
.05
NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
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Scenario 4: Cap Rate & NOI Expansion
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= = $20,000,000 $1.4M
.07
NOI
Cap Rate
$1M
.06 = = $16,666,667 NOI
Cap Rate
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NOI can be managed through:
1. Property Selection
2. Asset Management
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INTERNAL FACTORS
Net Operating Income (NOI)
What determines NOI?
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Property Selection
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Multi-family, Retail, Office, Industrial
Lease Durations Vary by Property Type:
Long-Term Leases – May offer downside protection with lower tenant turnover and more predictable income, but limited ability to raise rent and increase NOI
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Enable landlords to respond quickly to tenant demand, economic growth and inflation
Short to Medium-Term Leases
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MULTI-FAMILY RESIDENTIAL / APARTMENTS •High occupancy → Stable revenue •Today: Unprecedented demand, and •Historically low supply
MULTI-TENANT OFFICE • Quality tenants → Steady income • Class-A core assets → Value retention • Opportunity for growth
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Diversifying lease durations can help reduce risk and potentially maximize NOI in a portfolio of properties*
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Diversify Lease Durations
*Diversification does not ensure a profit or protection against a loss in a declining market.
0 2 4 6 8 10 12 14 16
Long
Medium
Short Apartments & Hospitality
Multi-tenant Office & Industrial
NNN Retail - Single Tenant
+ Y E A R S
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Picking a manager with expertise and experience to:
Active Asset Management
Increase Occupancy (%)
Increase price per square foot
Reduce operating costs
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Active Asset Management: KBS Case Study
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In Summary
For Broker Dealer Use Only
Understanding Commercial Real Estate Values
o Cap Rates
o Managing NOI through…
Property Selection
Active Asset Management
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Understanding Commercial Real Estate Values – 1 hour of CFP CE Credit
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Thank you for your participation!
Please be sure to provide your CFP information to receive your 1 hour of CE credit.
For more information: 1-866-527-4264
www.kbs-cmg.com
FOR BROKER DEALER USE ONLY
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2013 NFP STRATEGY SUMMIT INTERNAL USE ONLY. Not for public distribution.
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