How to Value Commercial Real Estate: Three Approaches and a Worked Example

Valuing commercial property requires more than multiplying floor area by an average asking price. Define the market segment, select comparable properties and account for fit-out, parking, operating expenses, rental income, legal characteristics and transaction terms.

Professional property valuation uses three main approaches:

1. Market comparison — value is derived from comparable listings and transactions.
2. Income — the property is valued through the income it can generate.
3. Cost — the cost of creating an equivalent property is estimated, allowing for depreciation and other adjustments.

The market comparison and income approaches are often most useful for a standard office. The cost approach may also be relevant to new, specialised or unique properties.

The aim is not a superficially precise figure, but a supportable value range as at a specific date.

All calculations are illustrative and explain methodology. They are not a valuation of a specific property or investment advice. A transaction, secured lending, litigation or other formal purpose requires a report from a qualified valuer.

In brief: how to make a preliminary commercial property estimate

Use the following process for an initial estimate:

1. Identify the property and right being valued.
2. Set the valuation date.
3. Find comparable offers.
4. Put comparable prices on a consistent basis.
5. Estimate the property's potential net income.
6. Compare the market and income indications.
7. Account for fit-out, operation, parking and legal restrictions.
8. Derive a range rather than one supposedly exact figure.

Simplified market comparison formula:

Office value = adjusted comparable price per square metre × floor area.

Simplified income approach formula:

Office value = net operating income ÷ capitalisation rate.

Both formulas look simple. The difficult work lies in selecting comparables, calculating net income and supporting the adjustments.

Asking price, value and transaction price are not the same

They are often used interchangeably, although they mean different things.

Asking price

The amount stated by the owner in a listing or commercial offer.

It may include room for negotiation, seller expectations and subjective considerations.

Market value

An estimated amount reflecting the property's likely value at a given date under defined market conditions.

Transaction price

The amount actually agreed by buyer and seller.

It may differ from market value because of:

• urgency;
• special payment terms;
• a relationship between the parties;
• fit-out requirements;
• included furniture;
• parking spaces;
• tax structure;
• the parties' individual motivations.

Cadastral value

A figure determined through state cadastral valuation and used for certain statutory purposes. It is not an automatic indication of the price achievable for a particular office today.

Any statement that a property is “worth” a certain amount therefore needs context:

• who determined the value and for what purpose;
• the valuation date;
• exactly what is included;
• which rights are being valued;
• whether ancillary premises and parking were included.

Why valuation is always date-specific

Commercial property markets change.

Value is affected by:

• new supply;
• vacancy;
• availability of finance;
• rents;
• new business-centre completions;
• occupier demand;
• the building's condition.

An estimate prepared earlier may no longer be suitable for a current transaction.

The following can become outdated quickly:

• asking prices;
• rents;
• fit-out costs;
• financing terms;
• available supply.

A professional report therefore states the date as at which value is assessed.

Which documents are needed to value an office?

Before calculating, establish exactly which property is being considered.

Documents and information usually include:

• an EGRN extract;
• title documents;
• the floor plan;
• area and floor details;
• technical documents;
• alteration information;
• leases;
• operating-charge information;
• parking details;
• fit-out, furniture and equipment details;
• restrictions and encumbrances.

A large-office offer may include several separate registered properties:

• the main premises;
• parking spaces;
• storage rooms;
• technical rooms;
• other non-residential areas.

The package cannot be valued properly without understanding the legal status of each component.

A detailed list of legal and technical checks appears in commercial real estate pre-purchase due diligence checklist.

What affects commercial property value?

Two offices of the same size may have very different values. Price per square metre reflects several groups of factors.

1. Business District

A strong business location can increase potential demand from:

• owner-occupiers;
• the tenants;
• investors;
• headquarters buyers.

The district name alone is not enough.

Important factors include:

• Distance to the metro;
• quality of the surrounding development;
• transport;
• amenities;
• development prospects;
• competing supply.

Our comparison of key office locations in the capital appears in the article on Moscow's business districts.

2. Building grade and condition

Value is affected by:

• architecture;
• Age;
• engineering systems;
• lifts;
• the entrance and lobby;
• security;
• management quality;
• Condition of common areas;
• parking;
• the business centre's reputation.

A formal Class A label does not mean that two buildings are equivalent.

One business centre may have modern engineering and efficient floors; another may have an attractive lobby but ventilation or power constraints.

The criteria for a high-quality office property are discussed in Class A offices in Moscow City.

3. Floor and views

A high floor may add value where it provides:

• open panoramic views;
• natural light;
• privacy;
• prestige;
• few comparable properties.

Height alone is not an unconditional advantage.

A buyer will also assess:

• lift speed;
• waiting times;
• climate control;
• solar shading;
• mobile reception;
• evacuation-route practicality.

Any floor-level adjustment should reflect the full set of characteristics, not just the number above the entrance.

4. Floor area and total budget

Price per square metre and total property value are related but do not always move together.

A large office may have a lower price per square metre because fewer buyers can afford the total amount.

A smaller unit may cost more per square metre but be accessible to a broader buyer pool.

A valuation should consider:

• demand for that type of space;
• the number of potential buyers;
• divisibility;
• the total transaction amount;
• availability of comparable offers.

Also assess office liquidity — the ability to sell or lease it without a material discount.

5. Layout

A flexible, efficient layout is generally more valuable than a complex space suited to only one occupier.

Positive factors include:

• clear geometry;
• adequate natural light;
• a manageable number of columns;
• the ability to alter partitions;
• several possible use cases;
• effective separation of employees and guests.

Factors that reduce appeal include:

• Long corridors;
• deep dark areas;
• unusable corners;
• a poorly positioned entrance;
• inability to divide the premises;
• material alteration restrictions.

Before buying, prepare several test layouts. If the premises work only in one narrow scenario, the valuation should reflect this.

6. Fit-out

A seller may assume that every amount spent on an expensive interior adds the same amount to property value.

This is not always the case.

A buyer assesses:

• quality of work;
• physical condition;
• design flexibility;
• whether the layout is suitable;
• suitability of engineering solutions;
• adaptation cost.

A neutral modern office may be more valuable than an expensive but highly specialised interior.

If the buyer intends a complete redesign, existing fit-out may represent demolition cost rather than value.

The scope and budget of comprehensive preparation are discussed in our article on office fit-out.

7. Engineering systems

Engineering provision directly affects whether the property can be used as intended.

Check:

• electrical capacity;
• ventilation;
• air conditioning;
• climate zones;
• backup power;
• internet connectivity;
• low-voltage systems;
• fire safety systems;
• equipment condition.

Insufficient power or ventilation may reduce value where substantial upgrades are required.

A buyer is likely to reflect those costs in the maximum price offered.

8. Operating expenses

High OPEX affects both the ownership budget and the asset's value.

If two offices generate the same rent but one carries higher owner expenses, its net operating income will be lower.

Before valuation, establish:

• operating charges;
• included services;
• indexation history;
• utility costs;
• parking costs;
• mandatory additional charges.

The structure of these expenses is explained in our article on office OPEX.

9. Parking

Parking is especially relevant to a client-facing office or headquarters.

The valuer and buyer should understand:

• how many spaces are included;
• whether they are included in the total price;
• whether they are separate registered properties;
• whether they can be sold separately;
• the maintenance costs;
• whether additional spaces are available.

Documented parking rights and verbal assurances should not be valued in the same way.

10. Lease and tenant

Where an office is sold with a sitting tenant, value depends on more than the premises.

Relevant factors include:

• rent;
• the lease term;
• indexation;
• security deposit;
• early-termination rights;
• allocation of operating expenses;
• the tenant's financial standing;
• whether the rent is at market level.

A reliable long-term cash flow may increase investment appeal.

An above-market rent is not always an advantage: it may not be sustainable after the lease ends.

Market comparison approach: valuation using comparables

The market comparison approach asks:

At what prices are similar properties offered and sold?

The process is:

1. Define the segment.
2. Select comparables.
3. Put terms on a consistent basis.
4. Make adjustments.
5. Calculate the indicated price per square metre.
6. Multiply the result by the subject office's area.

Which properties are genuinely comparable?

A good comparable is not simply another office in Moscow.

It should be similar in several respects:

• business district;
• building grade;
• floor area;
• floor;
• fit-out condition;
• views;
• parking;
• legal status;
• sale terms.

More differences require more adjustments and reduce reliability.

For example, do not directly compare:

• a fitted headquarters with shell-and-core premises;
• a middle-floor office with a penthouse;
• an office without parking with a package including spaces;
• a small unit with several connected floors;
• a VAT-inclusive price with a VAT-exclusive price.

Which adjustments may be required?

A comparable price may be adjusted for:

• the date of the offer;
• negotiation;
• location;
• Building class;
• size;
• the floor;
• views;
• condition;
• Parking;
• the tenant;
• operating expenses;
• payment terms.

The principle is simple:

if the comparable is superior, its price is generally adjusted down;

if it is inferior, the price is adjusted up.

Each adjustment must be supported by market evidence rather than guessed.

Why listings are not transactions

Public listings primarily show seller expectations.

The transaction price may be lower because of:

• negotiation;
• a lengthy marketing period;
• urgency;
• hidden defects;
• special payment terms.

Asking prices are useful but must be analysed critically.

Take particular care with properties that:

• have been marketed for a long time;
• change price repeatedly;
• are advertised by several agencies with inconsistent details;
• are no longer available but remain on aggregators.

Illustrative market comparison

Assume a hypothetical office in a modern business centre is being valued.

Three illustrative comparables are identified:

Comparable	Area	Illustrative asking price per sq m	Main difference
Property A	similar but slightly smaller	820 000 ₽	Fitted and on a lower floor
Property B	similar but slightly larger	750 000 ₽	Unfitted
Property C	similar in area	850 000 ₽	Higher floor and better views

After adjustments for fit-out, floor, size and negotiation, the model produces illustrative adjusted indications:

• Property A — adjusted market indication;
• Property B — adjusted market indication;
• Property C — adjusted market indication.

The market comparison produces an illustrative range:

a supported range based on the adjusted comparables.

Applied to the subject floor area, this gives:

an illustrative total value range.

This is not a formal valuation, but an illustration of how different offers are put on a comparable basis.

Income approach: valuation through rental income

The income approach asks a different question:

How much is an investor prepared to pay for the property's future cash flow?

A first estimate may use direct capitalisation:

Value = NOI ÷ capitalisation rate.

NOI is net operating income before debt service and certain owner-level items.

How to calculate NOI

A simplified process is:

1. Estimate potential rent.
2. Add other income.
3. Deduct vacancy and concessions.
4. Deduct owner operating expenses.

Formula:

NOI = effective income − operating expenses.

Use a realistic cash flow rather than contractual rent under ideal occupancy.

Illustrative income approach

Assume the model includes:

• potential annual rent based on current evidence;
• additional parking income;
• a vacancy and concessions allowance;
• owner operating expenses.

Then:

NOI = potential income + other income − vacancy and concessions − owner expenses.

Using a market-supported capitalisation rate:

NOI ÷ capitalisation rate = indicated value.

The income approach gives an indication based on the model assumptions.

The market comparison in the earlier example indicated a separate illustrative range.

A difference does not necessarily mean one calculation is wrong. Check:

• whether expected rent is overstated;
• whether expenses are calculated correctly;
• whether the capitalisation rate reflects risk;
• whether the comparables are appropriate;
• whether the market reflects fit-out quality and potential owner occupation.

Direct capitalisation and discounted cash flow

Direct capitalisation is useful where income is relatively stable.

If the forecast includes:

• the rent-free period;
• rent growth;
• a tenant change;
• major capital work;
• a future sale,

a discounted cash-flow model may be used.

It forecasts separately:

• income for each year;
• costs;
• capital expenditure;
• proceeds from a future sale.

Future amounts are then discounted to the valuation date.

This calculation is more complex and sensitive to assumptions. Changes in the discount rate or exit value can materially affect the result.

How to select a capitalisation rate

The capitalisation rate reflects expected return and property risk.

In simplified terms:

• a lower-risk, more predictable asset may command a lower capitalisation rate and higher value;
• higher risk generally requires a higher return and produces a lower value for the same NOI.

The rate is affected by:

• location;
• Building class;
• tenant;
• the lease term;
• liquidity;
• condition;
• income-growth prospects;
• supply;
• financing costs.

Do not take a rate from an article or another property's presentation without checking comparability.

Cost approach

The cost approach asks:

What would it cost to create a property of comparable utility today?

In simplified form, consider:

• the value of land rights or an appropriate share;
• construction;
• engineering systems;
• design;
• finishes;
• equipment;
• indirect costs;
• developer's profit;
• physical and functional depreciation.

The cost approach can be useful:

• for new properties;
• where there are too few comparables;
• for specialised property;
• when analysing expensive unique fit-out;
• as a cross-check on other approaches.

Historical cost does not equal market value.

The owner may have:

• overpaid a contractor;
• selected overly specific solutions;
• completed work the next owner does not need;
• experienced subsequent depreciation.

The market reflects utility to the buyer, not merely the seller's expenditure.

How to reconcile the three approaches

Assume the approaches produce:

• a market-comparison range;
• an income-approach indication;
• a cost-approach indication.

Do not simply add the three results and divide by three.

First assess the reliability of each result.

For example:

• where there are enough good comparables, the market comparison receives greater weight;
• where the property is fully leased to a reliable tenant, the income approach becomes more important;
• where the premises are unique and comparables scarce, the cost approach may matter, but market demand for the improvements must be tested.

The final value may be expressed as a supported range.

an illustrative total value range.

The transaction price may fall within or outside that range depending on negotiations and party-specific terms.

Market and investment value

Market value asks:

What might the property be worth to a typical market participant?

Investment value asks:

What is the property worth to a particular buyer with specific objectives and strategy?

For one company, an office may have additional value because of:

• proximity to existing departments;
• the ability to bring the team together;
• relocation savings;
• the value of the address;
• brand alignment;
• a rare headquarters format.

Another buyer may not receive the same benefits.

Investment value may therefore differ from market value. Buyer-specific value should not be presented to the whole market as an objective price.

How to value a unique office

Several comparables may be available for a standard unit.

A unique property requires a different approach.

Its value may be supported by:

• a lack of direct competitors;
• rare architecture;
• an exceptional location;
• scale;
• privacy;
• views;
• historic or branding significance;
• the ability to use it as a corporate headquarters.

Uniqueness also narrows the buyer pool.

A trophy-property valuation should therefore answer two questions:

1. How difficult is it to create or acquire a comparable alternative?
2. How many buyers are both able and willing to pay for that scarcity?

A generic average price per square metre becomes only one reference point.

How to Evaluate F-375

The F-375 office penthouse occupies a multi-level space on the upper levels of Federation Tower East.

The upper section sits beneath a glass dome, and the levels divide work, management and client-facing functions. Any parking included in the offer should be confirmed in the current transaction documents.

A property like this cannot be valued properly by multiplying a generic Moscow City office price by floor area.

Consider separately:

• the upper-tower location;
• the three-level architecture;
• the scarcity of direct comparables;
• privacy;
• the premises' readiness;
• engineering provision;
• documented parking rights;
• the value of a self-contained headquarters format;
• the limited pool of potential buyers.

The market comparison should seek comparables for scarcity as well as floor area. The income approach should reflect the real use case, and the cost approach the quality and reproducibility of the space.

The most supportable conclusion therefore comes from combining relevant methods and professionally reconciling the results, not one mechanical calculation.

When is a professional valuation required?

A preliminary internal estimate can help with:

• initial screening;
• negotiations;
• comparing offers;
• testing the seller's pricing logic;
• preparing a financial model.

A professional valuation is particularly relevant where value is required:

• for a major transaction;
• for secured lending;
• for corporate procedures;
• for litigation;
• for accounting or other formal purposes;
• for independent price support;
• to analyse a unique property.

Define the purpose in advance, as it determines the basis of value, date, documents and assumptions.

How to review a valuation report

Even a completed report should be read critically.

Check:

• whether the property is correctly identified;
• whether the valuation date is stated;
• whether the report's purpose matches your needs;
• which comparables were selected;
• how comparable they are;
• whether adjustments are explained;
• how income was calculated;
• which expenses were deducted;
• how the capitalisation rate was derived;
• whether omitting an approach is justified;
• whether there are arithmetic inconsistencies;
• whether inputs match the documents.

Polished presentation and length do not guarantee quality.

The key is whether the logic from source information to final value can be followed.

How to value an office before purchase: step by step

Step 1. Define the purpose

Decide whether value is needed for negotiations, purchase, investment analysis, lending or another purpose.

Step 2. Identify the property and rights

Establish the cadastral details, area and list of premises and parking rights.

Step 3. Set the valuation date

All market data should relate to a comparable period.

Step 4. Define the segment

Compare the property with offices of similar grade, location, size and condition.

Step 5. Gather comparables

Review listings and available transaction evidence.

Step 6. Put prices on a consistent basis

Confirm VAT, fit-out, parking, negotiation and ancillary properties.

Step 7. Calculate income

Estimate realistic rent, vacancy and owner expenses.

Step 8. Apply the appropriate methods

Calculate value using the market comparison, income and, where relevant, cost approaches.

Step 9. Review the result

Compare it with the market, ownership costs and potential liquidity.

Step 10. Obtain a professional opinion

For a formal purpose or high-value transaction, commission an independent valuation and verify its inputs.

Common commercial property valuation mistakes

Using a district-wide average price

An average combines buildings, floors, sizes and conditions that may not be directly comparable.

Using listings only

An asking price is not necessarily a transaction price.

Ignoring VAT

Two figures may look identical but be quoted on different bases.

Adding expensive fit-out at full cost

The market may value it below cost or reflect demolition expense.

Ignoring parking

Documented parking rights can materially affect a client-facing office's value.

Using gross rent instead of NOI

Income without expenses overstates value.

Ignoring vacancy

Even high-quality premises do not guarantee continuous occupancy.

Selecting an unsupported capitalisation rate

A rate change can materially alter the result.

Mechanically averaging approaches

The weight of each result depends on input quality.

Comparing a unique property with a standard unit

Rare architecture and a lack of comparables require tailored analysis.

In brief: how to determine office value

A preliminary estimate should:

• review documents and the offer's components;
• define the segment;
• find comparable properties;
• adjust for differences;
• calculate net operating income;
• select a supported capitalisation rate;
• account for fit-out and operating costs;
• derive a value range;
• cross-check with several approaches.

The market comparison shows what is happening in the market.

The income approach indicates what an investor may pay for future cash flow.

The cost approach indicates the cost of creating comparable utility.

The most reliable result is one in which the methods explain the value rather than simply produce numbers.

Unique properties such as an office in Federation Tower, require careful use of several approaches: a generic price per square metre does not capture architectural scarcity, headquarters format or a lack of direct comparables.

Frequently Asked Questions

How do you value commercial property?

Define the segment, select comparables, adjust for differences, calculate potential net income and compare the market comparison, income and, where relevant, cost approaches.

Which commercial property valuation methods are used?

The main approaches are market comparison, income and cost. The methods used depend on the property, purpose and available information.

How do you value an office from rental income?

Calculate net operating income and divide it by a supported capitalisation rate. Income should allow for vacancy, concessions and owner operating expenses.

How does market value differ from cadastral value?

Market value is assessed as at a specific date under defined market conditions. Cadastral value is determined through state cadastral valuation for statutory purposes.

Does fit-out cost form part of office value?

Fit-out affects value but does not necessarily add its full cost. Quality, condition, flexibility and utility to the next owner matter.

Can you value commercial property yourself?

You can derive a preliminary range for screening and negotiations. A formal purpose, major transaction or unique property requires professional valuation.

Why does price per square metre differ between similar offices?

It reflects location, building grade, area, floor, views, layout, fit-out, engineering systems, parking, tenant and transaction terms.

How do you value a unique office without direct comparables?

Broaden the comparable search and analyse substitutability, income potential, the cost of creating an equivalent space and the target buyer pool. Several approaches are generally used.