Why do some properties command valuations based on forward estimated income, whereas others on past income?
The simple answer is because of the average lease lengths and the extent to which those existing tenant leases inspire confidence in the buyer of the property to believe that they are likely to continue to receive the property’s in-place income stream.
To elaborate, let’s look at the average lease lengths of the various income-producing property types:
- office/industrial/retail – 5 to 10 years
- multifamily – 1 year
- self-storage – 1 month
- hotel – 1 day
Which of these property types do you think buyers have the highest faith in the continuation of the in-place income stream?
Naturally office/industrial/retail, as these property types have the longest average lease lengths. Hotel is at the other end of the spectrum, with only 1-day lease lengths. While property types will come in and out of favor with buyers, and every market in local in nature, it should be clear now why office/industrial/retail and multi-family are most likely to be valued off of forward NOI, whereas self-storage and hotel off of trailing twelve months NOI.