How is the current value of a shopping center calculated with a 15% vacancy rate?

The calculation of the current value of a shopping center involves understanding the flow of income that the property can generate, as well as the impact of vacancy rates on that income. The process typically follows the income capitalization approach, which is standard in real estate valuation.

The correct method to determine the current value is through dividing net operating income (NOI) by the capitalization rate (cap rate). The net operating income is calculated by taking the gross potential income, subtracting vacancy losses (which accounts for the 15% vacancy rate in this case), and then deducting operating expenses. This provides a clear picture of the income the property is expected to generate after factoring in vacancies and costs.

Dividing this net operating income by the cap rate gives you the present value of the property. The cap rate reflects the expected rate of return on investment and essentially serves as a way to compare different investment opportunities. This method is essential because it not only considers the income generated but also incorporates risk through the cap rate.

Finding similar property sale prices or adjusting operating expenses might inform you about market conditions or cost requirements, but they do not directly provide the current value of the property based on its income-generating ability, which is the crux of commercial property evaluations. Thus,