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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
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
What impacts Commercial Real Estate values?
Unlike residential, commercial real estate is valued on its income stream.
For Broker Dealer Use Only
CAP RATES NET OPERATING INCOME
Revenues -
Operating Expenses
Net Operating Income ÷
Purchase Price
EXTERNAL FACTOR INTERNAL FACTOR
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
For Broker Dealer Use Only
Source: Marcus & Millichap Research Services, CoStar Group, Inc., RCA
Commercial Property Cap Rate Trends
Cap Rates 101
Scenario 1: Cap Rate Movement, NOI Static
For Broker Dealer Use Only
$1M
.05 = = $20,000,000 NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
$1M
.10 = = $10,000,000 NOI
Cap Rate
RE
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TAT
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T I M E
RE
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TAT
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LUE
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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
RE
AL
ES
TAT
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VA
LUE
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T I M E
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
RE
AL
ES
TAT
E
VA
LUE
S
T I M E
Scenario 4: Cap Rate & NOI Expansion
For Broker Dealer Use Only
= = $20,000,000 $1.4M
.07
NOI
Cap Rate
$1M
.06 = = $16,666,667 NOI
Cap Rate
NOI can be managed through:
1. Property Selection
2. Asset Management
For Broker Dealer Use Only
INTERNAL FACTORS
Net Operating Income (NOI)
What determines NOI?
For Broker Dealer Use Only
Property Selection
For Broker Dealer Use Only
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
Enable landlords to respond quickly to tenant demand, economic growth and inflation
Short to Medium-Term Leases
For Broker Dealer Use Only
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
Diversifying lease durations can help reduce risk and potentially maximize NOI in a portfolio of properties*
For Broker Dealer Use Only
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
For Broker Dealer Use Only
Picking a manager with expertise and experience to:
Active Asset Management
Increase Occupancy (%)
Increase price per square foot
Reduce operating costs
For Broker Dealer Use Only
Active Asset Management: KBS Case Study
In Summary
For Broker Dealer Use Only
Understanding Commercial Real Estate Values
o Cap Rates
o Managing NOI through…
Property Selection
Active Asset Management
Understanding Commercial Real Estate Values – 1 hour of CFP CE Credit
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
2013 NFP STRATEGY SUMMIT INTERNAL USE ONLY. Not for public distribution.
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