Appreciation
Appreciation is the increase in a commercial property’s value over time. How much the property appreciates each year depends on the local real estate market and any improvements made to the building or units.
An increase in value is referred to as “appreciation” and a decrease in value is referred to as “depreciation”.
Appreciation (and depreciation) can occur for a number of reasons, including:
- The rate of inflation or changes in interest rates
- Increased demand or weakened supply
- The growth in the nearby surrounding market
Commercial real estate can appreciate over time if the property is well maintained and well tenanted, the surrounding area does not decline, or when inflation occurs. Commercial real estate has traditionally been one of the greatest hedges against inflation of all investment types due to the appreciation that occurs with it. Generally, rents also increase with inflation, which drive up an asset’s value depending on the cap rate of the local market.
In most instances, real estate investors rely on appreciation to generate wealth outside of the property’s cash flow. For example, a building that is purchased for $2,000,000 and appreciates at 2.5% annually would be worth $3,277,232.88 after 20 years.