Residential property valuation relies heavily on the sales comparison approach — looking at what similar homes nearby have recently sold for and adjusting for differences. Commercial property valuation works differently because commercial real estate is fundamentally an income-producing asset, so the income approach carries the most weight.
Under the income approach, an appraiser or investor calculates the property’s Net Operating Income (NOI) — total income minus operating expenses, not including debt service — and applies a capitalization rate (cap rate) appropriate for that property type and market to arrive at a value. A property generating $100,000 in NOI valued at a 7% cap rate would be worth roughly $1.43 million, for example.
Commercial appraisals also often use the cost approach (what it would cost to rebuild the property from scratch, minus depreciation) as a cross-check, particularly for newer or specialized properties where comparable sales are limited. The sales comparison approach is still used in commercial valuation, but it’s generally secondary to income analysis, especially for income-producing property types like multifamily, office, retail, and industrial.
This difference matters practically: a commercial property’s value can change significantly just by changing its lease terms or occupancy, even if nothing physically changes about the building, because value is tied to income performance. This is why lease structure, tenant creditworthiness, and vacancy rates are so central to commercial real estate analysis in a way they simply aren’t for a typical single-family home purchase.