Commercial Appraisals: Size Matters

One of the elements of comparison commonly found in the sales comparison approach section of a commercial appraisal is for building size. Rest assured, for commercial buildings, size matters. Buildings that are smaller tend to sell for a higher per-square-foot price. This pattern is observed across almost all property types. But the concept is often difficult for many people to understand, even for some appraisers. So I’m here to explain.

To demonstrate, the principle, I graphed the price per-square-foot of 243 industrial building sales across the State of Kentucky. After eliminating outliers, here’s the graph.

Impact of Size on Industrial Buildings

Notice that the curve for industrial buildings along the left side of the graph is steep and generally ranges between $40 – $60 dollars per-square-foot. As the size of the building approaches 30,000 – 50,000 square feet, building price trends drop below $30 dollars per-square-foot and flatten out near $20 dollars per square foot.

This trend is remarkably consistent across many property types including industrial buildings, retail buildings, vacant land, etc. Here’s the twist that can be confusing for some. When a comparison is made with an existing building, comparable sales that are larger than the subject property are classified as ‘inferior’ relative to the subject property (warranting an upward adjustment) while those that are smaller are classified as ‘superior’ to the subject property (warranting a downward adjustment).

While possible, it would be a mistake to base an adjustment to comparable sales based solely on the quantifiable difference in the per-square-foot price. But using this method can provide a great deal of insight into the impact of size on the price for various property categories. But the pattern is consistent. As it turns out, size really does matter.