Valuing office and industrial properties looks similar from a distance, but the drivers under the hood differ in ways that matter for pricing, financing, taxes, and strategic planning. I have sat at too many tables where owners tried to carry a single valuation playbook across both asset types and ended up missing money on the table — sometimes by a full capitalization point. Good appraisal work meets the market where it stands, not where we wish it to be, and it respects how each building makes and risks a dollar.
This piece breaks down how a real estate appraiser thinks through office versus industrial, where the methods overlap, and which metrics truly move the dial. I will anchor the discussion in practical examples, including dynamics we see frequently in secondary markets such as London, Ontario, where real estate advisory teams often weigh downtown office repositioning against industrial expansion.
Why office and industrial value differently
Cash flows define value, and cash flows come from rent less vacancy and costs. That sounds obvious until you unpack the operational realities that produce those numbers. Office tenants buy a workplace experience: location, transit, amenities, brand expression, and building services. Industrial users buy cubic volume, power, floor load, throughput, and reliable access for goods. When tenant priorities diverge, lease structures, capex burdens, and risk profiles diverge as well.
In office, the leasing cycle is slower and more speculative. Tenant improvement packages can equal a year or more of gross rent for a full-floor deal, and free rent stacks on top. Leasing commissions often sit at 4 to 6 percent of total rent over the term. Vacancy, once it appears, can linger. In industrial, downtime can be shorter if the building meets commodity specs, particularly in distribution corridors. Tenant improvements trend lighter, often limited to demising, dock equipment, and modest office buildouts. Those facts echo through every valuation metric a real estate appraiser uses.
The three classic approaches and where each shines
Appraisers lean on three primary approaches: income, direct comparison, and cost. All three can appear in both office and industrial assignments, but the weight shifts depending on the building’s age, tenancy, and condition.
Income approach. This is the backbone for stabilized assets, especially multi-tenant office and large-bay industrial. If an office tower has diversified tenants with staggered expiries, investors will price the stream of net operating income given current market rent, realistic stabilized vacancy, and recurring capital expenditures. For a modern distribution center with a strong credit tenant, investors may push even further toward yield, often via a direct capitalization of net rent or a discounted cash flow (DCF) for a single-tenant asset nearing rollover.
Direct comparison. This approach looks to sales of similar properties and adjusts for differences in size, age, location, tenancy, term, and condition. In liquid industrial submarkets, comparable sales can be plentiful and more uniform. That makes this approach particularly useful for standard, mid-bay industrial. Office comparables require heavier adjustments for lease-up risk, tenant mix, and downtown versus suburban dynamics. When an older building is mid-repositioning, a clean set of comps is hard to find and the income approach carries more weight.
Cost approach. For newer buildings, special-use assets, or markets with limited sales evidence, cost offers a helpful backstop. Industrial properties with heavy power, high clear heights, and specialized slab or racking loads can support cost-based logic if the depreciation can be reasonably measured. In office, cost becomes persuasive only for brand-new or near-new buildings, or when parts of the asset have unique features challenging to replicate.
A real estate advisory team in London, Ontario will often blend these approaches based on asset specifics. For instance, a 2020-vintage, 150,000-square-foot logistics facility near Highway 401 might rely on income and direct comparison, with cost as a cross-check given known construction benchmarks in Southwestern Ontario. A 1985-vintage downtown office mid-conversion to medical use will lean on an as-is income scenario and an as-complete sensitivity, with minimal reliance on cost because functional obsolescence muddies depreciation.
Office metrics that actually move value
When I assess office, five clusters of variables tend to define the valuation model. I will address each with numbers and the reasoning behind them.
Rents and concessions. Quoted gross or net rents are the start, not the finish. Effective rent after free rent, tenant improvements, and leasing commissions is the real input. Markets swing. In a softer leasing environment, a 30-dollar-per-square-foot gross rent might require 6 to 10 months free on a 10-year term and a tenant improvement allowance of 80 to 120 dollars per square foot for Class A downtown office. If net rent is the standard, operating cost recovery and caps on controllable expenses matter. Concessions change the economics even when the headline rent looks firm.
Vacancy and lease-up timing. Stabilized vacancy for downtown Class A might run 8 to 12 percent in a balanced market, but transitional assets can carry 15 to 25 percent. The difference between achieving stabilization in 12 months rather than 24 can swing internal rate of return meaningfully. Appraisers test lease-up absorption against recent deal velocity for the submarket, not wishful thinking.
Tenant improvement and capital reserves. Office life-cycle costs are real. Capital reserves in underwriting often land at 0.50 to 1.00 dollars per square foot annually for mid- to high-rise office, higher if the mechanical plant is aging. Tenant improvements flow as a lumpy cash requirement. In practice, I will model a leasing schedule with allowances and free rent at expected expiries, then smooth an annual reserve for building systems so the valuation reflects both the visible lease costs and the invisible capital obligations.
Credit and diversification. A tower with a single large tenant rolling in three years deserves a sharper yield than the same income spread across ten tenants with staggered expiries. Lenders pay close attention to rollover cliffs. Appraisers translate that risk into exit cap rates and renewal probabilities with rent step assumptions grounded in actual renewal spreads. If renewals recently cleared at minus 5 percent to market for legacy tenants, I will not assume flat or plus 5 just to make a pro forma sing.
Location and amenities. Office users will trade rent for connectivity and experience. Proximity to transit, structured parking cost, ground-floor retail mix, and building amenities like fitness and conferencing can lift achievable rent and narrow rollover downtime. Even a dated building can hold value if the landlord runs a tight operational program. An energy retrofit that cuts operating costs by 1.50 dollars per square foot can materially change tenant retention calculus.
Edge cases show how sensitive the model is. Consider a 120,000-square-foot Class B downtown office with 20 percent vacancy and 30 percent of gross leasable area expiring within 24 months. If the going effective rent nets 26 dollars per square foot after concessions, and capital reserves run 0.80 per square foot, a one-point move in exit cap rate between 6.50 and 7.50 percent will overshadow months of negotiation over a 25-cent rent bump. That is why professional real estate valuation puts cap rates and exit assumptions under a microscope and cross-checks them against closed sales and current financing quotes.
Industrial metrics with the most signal
Industrial valuation, particularly logistics and light manufacturing, starts with the building’s ability to handle throughput at the right cost. The metrics may look simple, but they carry layers.
Clear height and bay depth. The market pays for volume and efficiency. Going from 24-foot to 36-foot clear changes racking and pick strategies. Institutional buyers consistently differentiate pricing for modern 32- to 40-foot clear buildings, particularly above 100,000 square feet. In valuation, I adjust rents or cap rates to reflect this, supported by leasing comps and negotiated rents for similar bulk distribution.
Power, loading, and yard. Heavy power, multiple dock doors per 10,000 square feet, drive-in doors, trailer parking, and secure yard space are not perks, they are throughput enablers. For cross-dock buildings with a high door count and deep truck courts, the rent delta might be 0.50 to 1.50 dollars per square foot over finding a reliable real estate consultant commodity mid-bay, depending on the market. Replacement cost differences can be modest relative to the income premium, so the income approach rules here.
Location relative to logistics corridors. Tenants price time. Proximity to intermodal yards, highways, and last-mile nodes drives rent more than general zip code prestige. In Southwestern Ontario, proximity to Highway 401 and the Windsor border crossing can push absorption higher and lower downtime. An appraiser will model shorter lease-up periods and, in strong corridors, slightly tighter exit cap assumptions.
Tenant improvements and specialized use. Most distribution tenants need modest improvements. Manufacturing is different. A building with specialized venting, pits, and crane rails could sit longer if the user vacates. The appraisal needs a sensitivity: as-specialized versus as-generalized. If the borrower’s business relies on those improvements but the broader market does not, the lender will price the exit risk.
Lease structure. Industrial leases are often net, with tenants bearing taxes, insurance, and maintenance. Roof and structure may remain a landlord responsibility. When evaluating a 20-year single-tenant net lease at, say, 9.50 dollars per square foot with fixed 2 percent annual bumps, the cap rate will translate directly to price. Credit rating, remaining term, and break clauses become the fulcrum. For multi-tenant industrial, I will underwrite recoveries carefully, especially management and common area maintenance allocations after a multi-bay demising plan.
A useful comparison: a 150,000-square-foot, 32-foot clear distribution center in a tight node with 2 percent annual rent escalations, a five-year weighted average lease term, and a 4 to 5 percent market vacancy backdrop might trade 50 to 150 basis points inside a similarly aged, Class B office building downtown with 15 percent vacancy and uneven rollover. That is not a universal rule, but it is a pattern we have seen often enough to test against current evidence.
Reading cap rates with context, not hope
Cap rates are the blunt instrument that investors love and appraisers handle with tongs. They are not a single market number but a function of growth prospects, risk, liquidity, asset quality, and debt pricing. Across cycles, industrial has generally commanded lower cap rates than office in many North American markets due to resilient demand, lower capex drag, and clearer replacement logic. Yet even within industrial, a short-term single-tenant deal in a tertiary location will not price like an institutional cross-dock with 10-year weighted lease term.
A good real estate appraiser triangulates cap rates five ways: closed sales with verified income, current buyer bids and broker opinion of value, lender spreads and debt service coverage constraints, public REIT implied yields where comparable, and a DCF cross-check. If an office pro forma requires a 6.25 percent exit cap to justify the price, but the last three trades in the area printed 6.75 to 7.25 with higher occupancy, that tension must be addressed. Wishful underwriting is not valuation. In advisory assignments, we run sensitivities that show value per basis point of cap rate to keep negotiations honest.
The rent roll tells the real story
I have changed my mind about a property more times than I can count after a deep dive into the rent roll. A clean rent roll reveals:
- Weighted average lease term by income and by area, highlighting cliff risks. Step-up schedules, expense caps, and unusual clauses like go-dark rights or early termination. Recovery structures and the tenant’s share of property taxes after reassessment. Co-tenancy obligations in mixed-use office-retail assets. Credit markers, from financial statements to sales performance for retail-adjacent office.
The difference between a 6.00 cap and 6.75 can hide in a single clause that gives a 50,000-square-foot tenant an early termination right with a six-month fee. We price that risk, discounting projected income or layering a probability-weighted exit event. This is where experienced real estate valuation earns its keep.
London, Ontario case notes: office repositioning vs. industrial expansion
Markets like London, Ontario illustrate today’s divergence. Downtown office towers built in the 1980s and 1990s often face higher vacancy and heavier tenant improvement needs for modern floor plates. Suburban office nodes with surface parking and easier access may perform better on occupancy but still face a tenant-favorable market. Conversely, industrial land along the 401 corridor benefits from regional logistics demand and spillover from the GTA’s chronic scarcity.
A recent advisory scenario: an owner controlled a mid-1980s downtown office of 110,000 square feet with 18 percent vacancy and rolling leases clustered in years two and three. They also held a 90,000-square-foot, 28-foot clear industrial building near a logistics cluster at sub-3 percent vacancy. The office required an estimated 2.2 million dollars in capital over five years to refresh elevators, common areas, and HVAC, plus an assumed 35 to 60 dollars per square foot for tenant improvements on 50,000 square feet of likely turnover. The industrial required roof maintenance within five years at 0.60 dollars per square foot and minor dock work.
Under realistic rents and concessions, the office penciled to a stabilized net operating income that implied a 7.25 to 7.75 percent cap rate to match recent downtown trades, producing a price 10 to 15 percent below the owner’s book. The industrial, capitalized at 5.50 to 5.75 percent, supported a price 5 to 8 percent above book. The recommendation from our real estate advisory team was to divert planned office capex into targeted floor consolidations for medical-office conversion on two low-rise floors while pursuing a value-add lease-up on the industrial at escalated rents, backed by current tenant demand. That sequencing stabilized portfolio cash flow first, then addressed the longer office repositioning with a clearer leasing story.
Replacement cost, obsolescence, and why industrial has the edge
Replacement cost imposes a ceiling and sometimes a floor. Industrial construction tends to be more modular and predictable: tilt-up concrete, steel frame, standardized bay spacing, and slab specs. When land and materials move, you can price replacement within a tolerance that supports valuation decisions. Functional obsolescence is also easier to identify. If clear height sits at 20 feet and the market standard is 32, we can quantify rent discounts and likely downtime.
Office is trickier. The cost to create a new downtown office tower far exceeds market value in many cities today. That does not raise your existing building’s value automatically. It means existing stock competes on occupancy and net effective rent rather than on a new build threat. Functional obsolescence — narrow floor plates, limited natural light, outdated cores, low ceiling heights — can be expensive or impossible to fix. Appraisers reflect this through higher vacancy allowances, heavier capital deductions, and wider exit cap assumptions.
The better question is adaptive utility. A B-grade office with large floor plates near hospitals may pivot to medical or educational use if column spacing, plumbing, and mechanical capacity cooperate. That adds an option value worth exploring in the highest and best use analysis. In London, Ontario, we have seen credible cases where partial medical conversion improved achievable rent by 10 to 20 percent on converted floors while leaving the remainder as affordable office for local firms.
Modeling operating expenses with discipline
Operating expenses, once sloppy, have become a battleground. For office, taxes, utilities, cleaning, security, and repairs form the bulk, with energy often the swing factor. Reassessment cycles can shift tax burdens materially. If a property appeals its assessment successfully, value rises not because taxes dropped permanently but because probability-weighted future taxes look lower. Appraisers should reflect both current and stabilized expense levels, particularly when a one-time spike or reduction distorts the trailing twelve months.
Industrial expenses are lean but not trivial. Older buildings may leak energy through the envelope. Roof warranties matter. Snow removal and yard maintenance in Canadian markets add line items many first-time investors underestimate. In underwriting, net leases push these costs to tenants, but not always entirely. Watch for caps on controllable expenses and carve-outs that bring big-ticket items back to the landlord.
I often normalize office expenses at 12 to 20 dollars per square foot gross depending on service levels and taxes, then back into net rents and recoveries. Industrial might normalize in the 3 to 6 dollar range for tenant-paid operating costs in net structures, but that depends on local taxes and services. These are not rules, only starting points to validate against actuals and market norms.
Data quality, verification, and the art of the adjustment
Valuation is only as good as the data verified. I have seen glossy leasing flyers mislead by quoting face rates while burying six months free and hefty allowances. Closed-sale cap rates can be reported net of atypical credits or pre-funded reserves, inflating price-to-income relationships. The antidote is phone work, document review, and triangulation. A real estate appraiser who will not pick up the phone and verify terms is doing little more than averaging rumors.
Adjustments require judgment. If an industrial comp sold at a 5.25 cap with a 12-year lease to an AA-credit tenant, you do not apply that cap rate to a five-year lease with a private local firm and a 90-day termination option for expansion. You either adjust the rate upward, normalize the income to market, or both. The client deserves to see the logic and the math.
Practical red flags that warrant a second look
- Office lease expiries bunched within a single year and a plan that assumes 100 percent renewals at market rent without concessions. Single-tenant industrial with less than three years remaining and no concrete renewal intent, priced off long-term credit yields. Reported “net” industrial leases where the landlord quietly shoulders unrecoverable management, capital replacements, or yard costs. Office operating expenses that fall dramatically below peers without a specific operational reason, inviting a sharp reassessment or service cuts. Buildings with environmental legacies, particularly older industrial with potential subsurface issues. Phase I reports and any known records should inform the valuation risk.
How lenders and investors interpret the same numbers
Lenders read the rent roll for durability and underwrite to debt service coverage constraints. That can become the effective limit on value. For office, they may haircut income by a vacancy and credit loss factor even if the building is fully occupied, then increase reserves for tenant improvements and leasing commissions. For industrial, strong single-tenant credit with long term can unlock attractive proceeds, but rollover within the loan term can trigger a stricter amortization or additional reserves.
Equity investors weigh upside. A landlord who excels at managing office lease-up risk can underwrite more aggressive absorption and realize value that a conservative appraisal will not capture. Conversely, an investor focused on stable cash flow may accept a lower unlevered yield on modern industrial if the growth path is reliable. The appraisal should present a range with sensitivities around rent, vacancy, and cap rates so the client can see where their strategy fits on the risk spectrum.
Working with local expertise yields better calls
In markets like London, Ontario, local leasing velocity, municipal permitting timelines, and assessment patterns do not always mirror national trends. A real estate appraiser London Ontario based, or a real estate advisory London Ontario practice with day-to-day leasing conversations, can calibrate assumptions that a model built from national data would miss. Property appraisal London Ontario assignments benefit from speaking with the brokerage teams closing deals on both office and industrial, not just pulling headline numbers. For commercial property appraisal London Ontario owners seeking financing or contemplating a sale, getting the submarket facts right often shifts value enough to alter strategy.
A grounded way to compare office and industrial value
If you need a concise frame for board discussion, focus on these questions in this order:
- How durable is the current income, and how credible is the path to stabilization over the next 24 to 36 months? What is the true cost to capture or retain that income, including tenant improvements, free rent, leasing commissions, and building systems? Which physical attributes command a rent or yield premium in this submarket, and does the building have them? What do the last three to five verified transactions imply for yield, controlling for tenancy and term? How does realistic debt interact with net operating income to set the boundary for price?
A disciplined answer to those five questions will get you closer to market value than pages of boilerplate. They also work equally well whether you are valuing a midtown office tower or a logistics hub near the highway.
Final thoughts from the field
Office and industrial occupy different positions in the current commercial landscape. Industrial often enjoys tailwinds from e-commerce, supply chain reconfiguration, and nearshoring, while office grapples with hybrid work and re-tenanting. That gap shows up in rents, capex loads, and cap rates. Still, the right office asset in the right location, with the right repositioning plan, can outperform a generic industrial box. The appraisal should not assume a narrative; it should test it.
Experienced real estate valuation is less about spreadsheets and more about understanding how buildings make money, lose it, and demand it back in capital. A seasoned real estate appraiser will translate those realities into a transparent analysis you can challenge, adjust, and use. Whether your mandate is to refinance, sell, or reposition, the best real estate advisory teams put the metrics in context and do the unglamorous work of verification. That is where good decisions start, and where value is most often found.