Valuation and market analysis of an Oakville office property

Valuation Report

Identification of Subject Property

The subject site is an office property in Oakville, Ontario. It can be sold either in parts or as whole, and this report will consider the whole. The size of the whole building is 4016 square feet. The property is located on the service road adjacent to the Queen Elizabeth Way (QEW), a major highway in the region that links Toronto with the cities of Hamilton and Buffalo. The property can be subdivided into multiple units, at least three. There is a current tenant occupying 839 square feet and room for two more tenants or one primary occupant.

Valuation Report

Office rentals in Oakville typically come in between $0.90-$1.00 per square foot per month, for generic buildings such as the one described. Heritage buildings can rise towards $2 per square foot per month. Thus, the annual rental income for this property is around $48,192 per year. The tax burden is low as the result of government policy to attract office buildings to diversify the civic tax base away from the Ford plant. Total costs are around $11 per square foot for taxes and utilities, and these can be passed onto the client.

The building is situated on a rectangular lot fronting the North Service Road, with one driveway providing access. There are office buildings on either side of this property. There is substantial traffic and the location is convenient for workers who live in the area. The property has been subject to interior upgrades in recent years in order to improve its market value. Fixtures and furnishings have been modernized. Inspections of plumbing, electrical and HVAC systems have found that they all have passed. The building has several parking spaces and a small square footage of landscaping in addition to the interior square footage. There is no usable exterior square footage.

The feasible use of this building, given the physical building and the zoning, is as office space. The site is not zoned for light industry. It may be possible to re-zone for retail use, though the building is not suited for retail.

The land is on the North Service Road, which is adjacent to the QEW and to Ford Road. Property on this stretch of road is licensed for either office space or light industrial, and there is substantial square footage of office space available, much of it dating from the 1980s and 1990s. The land is flat, elevated slightly from the level of Lake Ontario a few kilometres away. There are no significant environmental issues with this property. The property is subject to property tax from the City of Oakville.

The first method for determining value is the income approach to value. Using the net present value method, the property's value would therefore reflect the current cash flows, discounted in perpetuity. The current discount rate for most buyers is around 4-6% given the low interest rate environment that prevails. The discounted cash flow method gives the valuation of the property as between $800,000 and $1.2 million. This is calculated as free cash flow / discount rate. At the midpoint of $1 million, this figure equates to $249 per square foot. This figure is much lower than prime real estate in downtown Toronto.

It is also worth considering what comparable properties sell for. This is the sales comparison approach. While this property clearly should be valued at a discount to real estate in downtown Toronto, it is important to understand the local market characteristics as well. A nearby property that was built in 1969 sells for $57 per square foot, showing the disparity in the region with respect to office real estate prices. For a building that was constructed in the 1990s, the price would be around double that, depending on the location.

A nearby building with a size of 6700 square feet has sold for $1.5 million, which equates to $223 per square foot. This indicates that the investment valuation method may have overvalued the building somewhat. The nearby building is of the same age and has comparable fixtures and furnishings. Thus, it makes a great comparable. The lower price may also be attributable to the surplus of office rental property and concerns about a slowing economy in the country. The market for prime real estate may be hot, but for suburban real estate of older pedigree, the range is clearly lower. If $223 per square foot is used, our building has a value of $895,458.

A third approach to valuation is the cost approach to value. The cost approach begins with the value of the land if undeveloped. There is a property on the market that is nearby, zoned for office use, and is undeveloped. This property is 8.69 acres and is on the market for $9.559 million. Our property, including parking, is about 12000 square feet, which would equate to 0.28 acres. Thus, the value of our property using the cost approach would be $308,000 for the land. The next step in this method is to determine the cost of the building, which would be for approximately 4000 square feet. The cost for office construction is around $125/square foot, so the price of the building is around $500,000. Paving the driveway would cost around $10,000. It could cost around $50,000 for HVAC and electrical work. The total estimated cost using the cost approach to value is $868,000.

Conclusion

The three approaches yield different results. The cost approach gives the lowest valuation, though construction costs may be higher in the short run given the building boom in the region. That said, the building boom is likely to result in overcapacity that will lower the value of office property in the next couple of years, especially the value of older, B-class stock in the suburbs. The cost approach and the comparables approach yield similar valuations, while the income approach likely benefits from a higher-than-average lease in the building. As a result, the valuation of the building is closer to what the other two approaches yield, and given the prevailing economic conditions a valuation of $880,000, roughly midpoint between the comparable and cost approaches, is a fair valuation for this property.

Other details

The building is zoned for commercial use (C3A).

Building Class: B

Units 105 and 115 can be combined.

There is currently one income-producing tenant, but the other spaces can be filled as well.

There are no encumbrances on this property

There are no deed restrictions

References:

Colliers Canada: http://www.collierscanada.com/8034

CP. (2013). Leading forecaster sees bleak days for Canadian economy. CBC News. Retrieved April 30, 2013 from http://www.cbc.ca/news/business/story/2013/04/09/business-bleak-outlook-capital-economics.html