How Do You Value Commercial Real Estate?

Valuing commercial real estate uses three main methodologies that professional appraisers and serious investors apply in combination rather than relying on any one approach in isolation. The income approach, the sales comparison approach, and the cost approach each measure value from a different angle, and using all three on a Salt Lake City commercial property produces a more defensible valuation than any single method.

The income approach is the workhorse for most income producing commercial property. NOI divided by market cap rate equals value. A Wasatch Front industrial flex building with $180,000 of NOI in a market trading at 8 percent cap rates is worth $2.25 million. The direct capitalization method is one variant. The discounted cash flow method is another, projecting cash flows over a 10 year hold and discounting them back to present value using a chosen discount rate. DCF is more common on larger and more complex properties where year by year cash flows vary significantly.

Getting income approach right requires getting NOI right. That means using verified actual rents from leases and estoppels rather than asking rents or pro forma. Operating expenses must be complete including property management at 3 to 5 percent of gross rent, capital reserves at $0.25 to $1 per foot annually, and post sale property tax in markets like Utah where taxable value resets at sale. NOI calculated correctly is often 10 to 20 percent lower than NOI from a marketing OM.

Getting cap rate right requires comparable sales analysis. The appraiser or analyst identifies recent transactions on similar properties in similar submarkets and extracts the cap rates those deals traded at. Salt Lake City industrial cap rates in 2026 cluster differently from office or retail. Newer single tenant net lease properties trade tighter than older multi tenant. Specific submarkets including Silicon Slopes office, 5600 West industrial, downtown Class B office, and Sugar House retail each have their own cap rate ranges.

The sales comparison approach values property by comparison to recent sales of similar properties. The analyst identifies properties that sold within the last 6 to 18 months that share characteristics with the subject property. Adjustments handle differences in size, age, condition, location, and tenant quality. Per foot pricing is the most common output. Wasatch Front industrial may trade at $150 to $250 per foot depending on age and submarket. Retail centers trade at $200 to $500 per foot. Office trades across an even wider range.

Sales comparison works best on properties that trade frequently. Smaller industrial buildings, neighborhood retail centers, and standard multifamily all have enough transaction volume in Salt Lake City to support credible comparable analysis. Special purpose properties including medical office, hotels, and automotive service buildings trade less frequently and require careful comp selection or specialized techniques.

The cost approach values property as the sum of land value plus the depreciated replacement cost of improvements. Land value comes from comparable land sales. Replacement cost comes from current construction pricing in the local market. Depreciation reflects physical wear, functional obsolescence, and external factors. Cost approach matters most on newer properties, special purpose buildings, and properties where income data is incomplete. On older income property in established markets, cost approach typically sits as a secondary check rather than primary valuation.

Reconciling the three approaches produces the final value conclusion. On a typical Salt Lake City multi tenant industrial building, the appraiser might weigh the income approach at 70 percent, sales comparison at 25 percent, and cost approach at 5 percent. On a brand new owner user building, the weighting might invert with cost approach carrying more weight. The art of valuation is matching method weights to property characteristics.

Things that move value beyond pure financial metrics. Tenant credit quality affects cap rate selection. Lease term remaining affects risk. Location quality affects long term demand. Property condition affects near term capital needs. Submarket trends affect future rent growth. Each variable shows up somewhere in the analysis.

Omada Commercial, recognized as best commercial real estate agents in Salt Lake City, runs full valuation analysis using all three approaches when listing or evaluating commercial property across the Wasatch Front. Defensible numbers protect both sides of a transaction.