Investment Parameters—How Differing Investment Parameters on the Part of a BUYER can Affect the Value of Commercial Real Estate

Investment Parameters—How Differing Investment Parameters on the Part of a BUYER can Affect the Value of Commercial Real Estate

I have never given thought much about how real estate values (especially commercial real estate values) can be affected by differing investment parameters on the part of different buyers.

I recently had some experience with this—two different clients of mine just 'overpaid': one for a site on Carling Avenue and one for a site on March Road in Ottawa. They didn't really overpay but they paid at the top end of a range that I found reasonable.

The purchaser who bought the Carling Avenue site did so because, in addition, to making use of the actual site, they get marketing exposure for another, less high profile location. That is, by being on Carling Avenue, they can also feed overflow business to their other location. So they paid more for the site because it generates extra off-site business.

The client who bought on March Road would NEVER have paid that much for the site on its own merits. They had three other factors affecting their decision: a) they had just sold their existing March Road location for a HUGE amount of money, b) their operating business is booming, c) they needed to stay on March Road to keep it that way.

Come to think of it, maybe that explains why commercial appraisals are so often 'wrong'; because they don't, and perhaps can't, take into account such variability in the investment parameters of the BUYERS.

FOR EXAMPLE, IF YOU HAVE A COLLISION CENTRE IN A 'BACKWATER' LOCATION, HAVING A SMALLER COLLISION CENTRE IN A HIGH PROFILE LOCATION THAT GENERATES EXTRA WORK FOR THE FIRST LOCATION MIGHT LEAD YOU TO PAY MORE FOR THE NEW SITE THAN ANY OTHER POSSIBLE PURCAHSER.

These kinds of ‘externalities’ mean that some buyers can pay more for a given site and it still makes good economic and investment sense for them.