INTERNATIONAL JOURNAL OF SCIENTIFIC & TECHNOLOGY RESEARCH VOLUME 8, ISSUE 12, DECEMBER 2019 ISSN 2277-8616

Factors Affecting Commercial Property Value

Haw Li Ping, Janet Jemes, Lim Kian Fung, Ngoo Pei Yin, Nur Aiza Maidin, Mohd Shahril Abdul Rahman

Abstract: Commercial property in real estate is an asset that makes commercial profits, including shops, malls, office buildings and industrial parks. The
objective of this study is to determine the factors that affect the value of the commercial property. It determines the factors that affect the value of the
commercial property, whether the value of the commercial property rises or falls. The findings show that economic factors, transport, land use, quality
design requirements, energy efficiency, etc., have an impact on the price of commercial property. In order to do these, market changes will have an
impact on the value of commercial properties and require further action to overcome and accommodate them, i.e. policy review further research.

Index Terms: property value, factor, commercial, determine, land value, market price, micro, macro
——————————  ——————————

1. INTRODUCTION The remaining sections are Methods (Section 2), Findings and
In real estate, commercial property is property used to make Discussions (Sections 3-4) and Conclusions and
commercial profits, including shops, malls, office buildings and Recommendations (Section 5).
industrial parks. Commercial Property is divided into several
types of offices, shops and industrial property. There are 2 METHODS
different categories with their own purpose. Offices used for The literature review (literature survey, content analysis,
the conduct of business, the provision of professional services thematic coding and inductive reasoning) (Ayob, 2005; Bluhm
or other administrative and government activities. Shops are et al., 2011; Denzin & Lincoln, 2000) was used to identify
either a shopping complex or a retail outlet for consumption factors affecting the value of commercial property. These
purposes. Industrial property is used for the production methods have also been used previously by researchers in
process. (Ball, M., Lizieri, C., & MacGregor, B., 2012) this field of study, i.e. Chong et al. (2019), Onuoha et al.
According to Dan Nduti and Mr. Wambugu, commercial (2018), Rahman et al. (2015a), Rahman et al. (2015b). This
property value is developing an opinion on the value of the was done through a comprehensive search for publications
property in market value. There are several methods for the related to the value of commercial property factors. The
valuation of commercial property. Firstly, the capitalization following databases have been searched: Google Scholar,
approach is one of the methods of valuation of commercial ScienceDirect, Emerald, Scopus, SpringerLink, and SAGE.
property. The capitalization approach is a traditional method The publications contain a variety of literature on the factors
that is easy to implement compared to other techniques such used to determine the value of the commercial property. In the
as Discounted Cash Flow (DCF) and is useful when market search for such literature, the following keywords are used:
information is lacking because it is based on rental income. factor, commercial property value, land value, determinants
Second, the comparative approach is also one of the methods and market price. The review period is from 1994 to 2017.
used to value commercial property. Normally, it is used to After a thorough review, the literature with redundancy and
value retail or a shop. The comparative approach is a basic considered improper was filtered out. There are a total of 20
one for the other methods. However, a comparative approach journals with publications on the determinants of the value of
is difficult to execute when there is a lack of market the commercial property. Factors that influence the value of
information. In other words, a comparative approach is the commercial property extracted from the 20 journals
effective when there is a high level of data transparency, which generated a total of 19 factors, as indicated in the following
means that the possibility of obtaining sales evidence is high. sections. These factors are then grouped into macro and micro
In addition, a cost approach can be used to value commercial factors
property, such as a shopping complex that is considered to be
a special property. Cost approach is used if there is a rare 3 MACRO FACTORS
transaction, or if there is no transaction of a particular property.
(McParland, C., Adair, A., & McGreal, S., 2002) In order to do 3.1 Economy factor
so, a change in the market will have an impact on the value of The economy is one of the main factors contributing to the
commercial property and will require more research to prove it determination of the price of commercial property. According
in the future. to Robert Cervero and Michael Duncan, the economy is one of
Some factors will have a positive effect on commercial the price-related factors, such as "Spikes in land values could
property, while the value of commercial property will increase. be attributed to other factors, such as an upswing in the
In other hands, the value of the commercial property also regional economy, improved road conditions, or better
decreases the negative effect of some of the factors. For that, schools." The author explains that the regional economy also
the aim of the study is to determine the factors affecting the contributes to the price, just like other factors. "In addition,
value of commercial property. while the owners of a business property are legally liable to
———————————————— pay non-domestic taxes, they may be able to transfer some of
 Real Estate Department, Faculty of Built Environment and Surveying, the tax burden to other economic agents such as consumers
Universiti Teknologi Malaysia (UTM), Johor Bahru, Johor, Malaysia (via higher output prices), employees (via lower wages) and
(Email - 6Co-responding author: mshahril.ar@utm.my ) landlords (via lower rents). This is explained by the fact that a
business that operates in a commercial property can make the
exception of paying the tax by lowering the cost of the
customer's output prices, paying a lower salary to the worker

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and paying a low rent to the landlord. This may have an impact property. (Nelson, 1999 A. C.). To illustrate this, the
on the commercial property in terms of the cost of running the intervention of public policy enhances accessibility to certain
building business. The economic factor is also mentioned by amenities of public transport. One of the policy criteria is
Bruno Giussani, Marshall Hsia and Sotiris tsolacos (1992) who supply restriction. To illustrate this, if there is a policy to restrict
said, "Although the study does not clarify the precise the development of commercial properties around certain
relationship between the owner-occupied and rented markets, stations, such as the railway system, it could have an impact
it suggests that changes in the cost and return on capital affect on property value as commercial property value will be high if
the overall purchase / rent decision in line with the interest it is close to the railway system that will also be discussed in
rates in four regions of the United Kingdom." So we can say our findings.
that the owner's decision to rent or buy a commercial property
is also affected by the rented market. Next, according to the 3.3 The density factor
author, E. Philip Davis and Haibin Zhu said the higher property Density factor is one of the determinants mentioned by Robert
prices facilitate the expansion of bank lending to the real Cervero and Michael Duncan in their article on Transit's Value
estate sector. On the other hand, the increase in bank credit Added Effects Light and Commuter Rail Services and
tends to boost the property market in the short term, but the Commercial Land Values. Research found that there were also
impact will turn negative in the long run due to an oversupply significant numbers of employed residents clustered around
of new construction. "The explanation is the relationship commercial properties, with an average of almost six
between the economy and the property price in terms of the employed-residents per gross acre within a1-mile radius of
bank lending outlook. The author is trying to simplify the idea sampled parcels (or a total of 11,795 employed-residents
that higher property prices will increase bank lending to the within a1-mile radius). Generally, commercial parcels were in
property sector, but will increase the impact of bank credit and desirable neighborhoods, reflecting average building value of
will have an indirect impact in the future due to oversupply. more than $70/ft2 and average household income of more
The price will soon increase due to the supply while the than $68,000, according to Robert Cervero and Michael
demand is still low. In addition, the research carried out by S. Duncan. Research shows that there is an increasing number
Mr. Dobson and Mr. J. A. Goddard tells us that' rents and of densities in the location of commercial property due to the
prices in both locations (model research) must increase in worker who works in the area. This is because the worker
order to reduce demand and stimulate supply until market tends to stay near their place of work. The reason workers
clearing is restored in all cases. The result explains that, in stay close to their place of work is because they reduce the
order for the market to be stable in a certain place, the rent cost of transport.
and the price of the property must be increased. This action is
quite risky because the increase in price and rent of property 3.4 Land use
will have an impact on the consumer to find other properties One of the factors that will influence the value of commercial
for rent. However, the plan is well said that if rent and price property is the type of land use. Four authors have identified
increase, demand and supply will be returned to order. So, we and agreed that the land use factor would have an impact on
can say that an increase in rent and property prices can have the value of commercial property, namely Robert Cervero &
an impact on the market to be in good order. Demand on the Michael Duncan and Chris Huffman & Stanley D. Longhofer.
market will influence the price of property, which is a factor RobestCervero and Michael Duncan argued that the type of
highlighted by the economic factor. Growth in business land use within 1 mile of commercial property could affect the
services employment is linked to increased demand for office value of commercial property. They also said that if a
space, increased consumer spending leads to increased commercial property located near public land use, such as a
demand for retail space, and increased production output is university, hospital and police station, the value of a
linked to demand for industrial space, said Ball, M., Lizieri, C., commercial property would increase. Other than that, Chris
& MacGregor, B. (2012).-Yes. The author explains that the Huffman and Stanley D. Longhofer carried out separate
demand for office space has been influenced by the growth of statistical analysis for different types of land use, such as
employment in business services, while increasing demand for retail, industrial, vacant lot and office land use, since different
consumer spending will also influence retail space for types of land use will have different effects on different factors.
industrial demand. This is because demand has had a huge The authors used the regression analysis to calculate the
impact on property prices, especially when the supply offer is coefficient for each land use. For example, the land area
low. According to J Flaherty's research (2014) "The capital coefficient for office land use is 0.225. This means that if the
return indices of the Australian commercial property markets size of the land increases by 1%, the value of the office will
(Aus Composite, Retail and Industrial Property) have increase by 0.225 per cent. Apart from that, the gross building
significant positive correlations with inflation (CPI), the area coefficient for retail land use type is 0.511, which means
demand side of the economy (GDP and NCE) and the supply that if the gross building area increases by 1%, the retail land
side of the economy (APV and CMC)." The author explains value will increase by 0.225 per cent. Normally, when there is
that the economic factor, such as inflation, demand and public land use in the area, there will be a lot of labor and
supply, has a significant positive relationship with the return on residents crowded around public land use, such as the
commercial capital of the property, because, when inflation hospital and the university. By increasing the density of labor
occurs, the price of the property tends to increase due to high and residents in this area, commercial property will benefit
demand while the supply of the property is low, resulting in a from many potential customers and potential employees. As a
higher return on capital of the commercial property. result, the value of commercial property will be increased.

3.2 Policy Intervention

Political intervention can influence the value of commercial

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3.5 Supply of new properties or convert existing

properties to alternative uses
Supplying new properties or converting existing properties to
alternative uses is also a factor that influences the value of the
commercial property. This factor explains that the value of the
commercial property may change if new residential properties
are built in the surrounding area of the commercial property.
This has a positive effect on the price of commercial value, as
there will be a large number of neighborhood residents who
will increase the rate of visitors to commercial properties. In
addition, the conversion of existing properties to alternative
uses has a positive or negative impact on the commercial
property value. For example, if the residential area is
converted to an industrial area at the end of the lease term,
the value of the commercial property will decrease as potential
buyers (residents) are lost. On the other hand, if a commercial
property is built in an area where the conversion from
industrial property to residential property takes place, the price
of a commercial property will increase because there will be
more buyers (future residents). Bond, Denny, Hall, and
McCluskey (1996) argued that rental of commercial properties
is subject to change when new properties are constructed or
existing properties are converted to alternative uses. Thus,
when the supply of new properties or the conversion of FIG. 1: FACTORS AFFECTING COMMERCIAL PROPERTY VALUES
existing properties to alternative uses increases the value of (MACRO)
the commercial property, either negatively or positively affects 4 MICRO FACTORS
the value of the property.
4.1 Traffic volume
3.6 The Non-Domestic property tax factor In addition, the traffic volume can be one of the determinants
The non-domestic property tax factor is the other determinant of the value of the property. It tends to have an impact on
mentioned by Stephen Bond, Kevin Denny, John Hall and certain commercial properties which are retail but not office
William McCluskey in the article entitled Effect of non-domestic properties. According to Chris Huffman and Stanley D.
rates on commercial property rents: an empirical study. The Longhofer, a 1 per cent increase in traffic volume will increase
author points out that the value of commercial property is retail property sales prices by 0.287 per cent. This is because,
indirectly affected by the non-domestic rate. Stephen Bond, when the volume of traffic increases, the visibility of
Kevin Denny, John Hall and William McCluskey (1995) argued commercial property increases.
that the impact of non-domestic rents on property markets
could be to bridge the gap between the ' demand value ' 4.2 Social amenities
charged by the owner of the property and the ' offer price ' Social amenities ar e one of the factors that will affect the
provided by the owner of the property by Commercial Property value of commercial property. Dan Nduti & MsWambugu
Rent tends to change due to market demand and supply. The (2017) stated that although the social amenities are
tax change is also reflected in the change in property prices, unobserved characteristics that could influence the value of
according to Stephen Bond, Kevin Denny, John Hall and the commercial property, the characteristics would be related
William McCluskey (1995) "This change in the tax rate will to the geographical location of the residential property in the
result in a combination of an increased rent paid by the tenant vicinity. As a result, the value of commercial property will
and a lower rent received by the landlord." The author also increase as social amenities are provided in a good condition
mentions that economic theory suggests that changes to non- that people can easily access and get from the
domestic rate bills may lead to changes in commercial neighbourhood. In addition, people will go to commercial
property rents in the opposite direction. In addition, the impact properties in the vicinity of residential properties that provide
of rate bills on property markets may vary, both over time and health and care facilities, educational institutions and so on.
between different sectors of the property market.
Figure 1 provides an overview of all the factors collected. 4.3 Transportation/infrastructure
Transportation and infrastructure, such as the railway station,
is one of the factors affecting the value of commercial property.
This factor has been mentioned by many authors from 7
articles out of 20 articles that we found out, such as
GhebreegziabiherDebrezion & Eric Pels&Piet Rietveld, Tao
Xu, Ming Zhang b, Paulus T. Aditjandra, Kate ko&Xinyu, Dan
Nduti&Mr Wambugu, Robert Cervero and Michael Duncan,
Haixiao Pan and Ming Zhang, and Chris Huffman and Stanley
D. Longhofer. First of all, Ghebreegziabiher Debrezion & Eric
Pels and Piet Rietveld explained that the difference in the

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value of the commercial property is measured by the 4.6 Age of property

accessibility of the commercial property to the transport station Chris Huffman and Stanley D. Longhofer said that age is one
and the cost of transport. They also found that a higher quality of the factors that influence the value of commercial property.
railway station would have a greater impact on commercial Both said that the age factor had a negative relationship with
properties located near the railway station. Dan NdutiAnd Mr. the value of commercial property. The result of the regression
Wambugu also said that investors will be more willing to invest shows a positive age-square coefficient, which shows that
in that commercial property if the commercial property is when the age of commercial property increases, the value of
located in an area with adequate transport facilities and thus the property will decrease. This has been lead by the overall
increase the demand and value of the property. Robert attractiveness and appearance of the property decreased and
Cervero and Michael Duncan argued that commercial property the cost of repair and maintenance increased when the
would benefit more from capital appreciation than residential property got older. All of the reasons will reduce the demand
property due to the transport factor. Other than that, Kate for old commercial property, thus lowering the value of
Ko&Xinyu said that if a commercial property is located far from commercial property.
the transport station, the value of the property will decrease.
The reason for this is that the wiling ness to pay for the 4.7 Improved highway quality
property decreases when the accessibility of the property to Improved highway quality also plays an important role in the
the railway station decreases. Tao Xu, Ming Zhang and Paulus factor affecting the value of commercial property. Robert
T. Aditjandra found that the MRT station in Wuhan, China, had Cervero and Micheal Duncan (2002) pointed out that not only
increased the value of commercial property in the vicinity of will the rail service increase the land value of commercial
the station. They also found that commercial properties in the property, but that it also includes a factor that influences land
vicinity of the MRT station in Wuhan, China enjoy a 9.02 per value. A highway of good quality will reduce accidents and
cent increase in property prices. This happen when the ensure safety in the road due to its increased stability and
accessibility of commercial property to the transport station reliability in the commercial area. In addition, residents will
increases, demand for commercial property will also increase easily pass through the highway of good quality to the
and demand will increase the value of commercial property. commercial area, which may increase the value of commercial
Commercial property located near the railway station will property. Improved highway quality will therefore have a
benefit from shorter transport time and also travel costs, thus positive impact on the value of commercial property.
increasing the value of the commercial property.
4.8 Flood zone
4.4 Neighbourhood quality The flood zone is considered to be one of the determinants of
Neighborhood quality will also be one of the factors affecting the value of the commercial property. Today, floods are
the value of commercial property. According to Robert Cervero becoming a global concern. It's because people are affected
and Micheal Duncan (2002), commercial value is said to have by the flood. They lose their property, their clothes, their
an impact on household income when the commercial parcel shelter, their food and their drinks, and even the one they
is within a1-mile radius. This article explains that when people loved because of the flood. This flood risk is increasing as the
stay around commercial property, the value of commercial world is developing with so many buildings and less initiative
property will increase as household income is high. As a to avoid the risk of flooding. Despite this, most of the buildings
result, the household will be able to buy the thing when they are subject to exposure to flood risk, and the value of the
have a high purchasing power. It is therefore clear that the property is affected by such an incident. Commercial property
quality of the neighborhood will influence the increase in the is also not an exception in this case. Huffman and Longhofer
value of commercial property. (2016) run a regression model between the flood zone and the
commercial property value where, as a result, the flood zone
4.5 Signalized corner lot has been shown to have an impact on the commercial
Signalized corner lot plays an important role in affecting the property value where the value decreases. In addition, before
market value of commercial properties. Signaled corner lot a developer builds a commercial property, he should carry out
refers to a piece of land that is located where two roads research on the location and surroundings of the flood zone. In
intersect. This type of land is more valuable because it has a addition, commercial property that is built within the flood zone
frontage on two of its sides. Normally, commercial property is more likely to fall in value because people will not afford to
developers tend to pick up a signposted corner lot so that the go to a commercial property where a flash flood could occur at
value of the property increases where a lot of people are any time. Thus, the flood zone negatively affects the value of
aware of the existence of the property since it has two frontage commercial property.
sides. This is explained by Huffman and Longhofer (2016) by
stating that the value of the signaled commercial property is 4.9 International airport
more valuable than the signaled non-corner lot where the The international airport has an impact on the value of
coefficient is between the signaled corner lot with a commercial property. To illustrate this, the value of trade will
commercial property value and the signaled non-corner lot decrease as the distance to the airport facility increases. This
with a commercial property value. The result showed that the scenario will be more obvious for commercial properties that
signaled corner lots had a higher coefficient of commercial are particularly used for aviation purposes. These international
property value than the signaled non-corner lots. As a result, airports increase the importance of airport planning as well as
the signaled corner lots have a positive impact on the the integrated metropolitan area. (Cohen, J. P., and Brown, M.,
commercial property value. 2017).

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4.10 Design quality specifications

Design quality specification factor was stated in articles written
by IlirNase, Jim Berry, Alastair Adair, Robert Cervero and
Michael Duncan and Stephen Bond, Kevin Denny, John Hall
and William McCluskey as factors affecting the value of
commercial property. IlirNase, Jim Berry and Alastair Adair
argued that the design quality specification included
connectivity and building façade distinctiveness, the quality of
materials used for commercial property construction. When the
built environment of a commercial property has improved, the
value of a commercial property will also improve. Buyer tends
to purchase a commercial property with a good design and
built with high quality building materials. Higher quality of
commercial property had a higher level of amenity with
capacity, which would increase the utility of the user. When the
design and quality of commercial property increase the
demand for commercial property will increase and increase
the value of the property as the purchaser is more willing to
purchase higher quality commercial property. Stephen Bond,
Kevin Denny, John Hall and William McCluskey and Robert
Cervero and Michael Duncan also said that the quality and
design of the property would increase the rental price and
market price of the commercial property. Design quality
specifications that increase the price of commercial properties
are, for example, fiber optic cable, building materials quality
and modern design. Normally, investors or buyers tend to
purchase commercial properties of higher quality because the
cost of repair and maintenance will decrease as all parts of the
property will run longer and then increase the price of
commercial property.

4.11 Energy performance/energy efficiency FIG. 2: FACTORS AFFECTING COMMERCIAL PROPERTY VALUES
Energy performance and energy efficiency are one of the (MICRO)
factors that have an impact on the value of commercial
property. Two authors, Franz Fuers, Patrick McAllister and In our opinion, energy performance will be a major factor
Markus Surmann, Wolfgang Brunauer, Sven Bienert, affecting the value of commercial property. Property with
mentioned this factor. Both articles found that there is only a higher energy performance, owners or tenants who stay in the
weak relationship between energy performance and the value property will benefit from lower operating costs as there is less
of commercial property. The reason for the weak relationship electricity and water in the property due to solar panels and
between them is that the energy efficiency of the property is rainwater harvesting installed in the property. It will also
still not a key factor in considering the purchase of the increase the productivity of workers, as it will increase the
property. The other reason is that the number of observations satisfaction of workers and reduce the turnover of employees
is less and too weak to prove the strong relationship between in commercial properties. As far as investors are concerned,
energy performance and property value. investors will benefit from reduced holding costs. This is
because when the energy efficiency of the building increases,
the vacancy rate will decrease and the retention of tenants will
increase. All of this will contribute to an increase in the value of
commercial property.

4.12 Time of property on the market

Allison M. Orr, Neil Dunse and David Martin have stated in
their article that the time of property on the property market is
a factor affecting the value of commercial property. The time
taken to sell the property usually takes a long time because of
the buyer's consideration and the buyer's compromise on the
price of the property. The property price decided by the seller
shall determine the duration of the transaction of the property.
Normally, the seller will set a competitive price to speed up the
time of the property transaction. In order to speed up the
process, the seller will lower the price of his property in order
to sell his property more quickly. Higher property prices will
increase the likelihood of a long property transaction. The

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faster the seller wants to sell his property, the lower the price methods", Journal of Facilities Management, Vol. 17
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[3] Ball, M., Lizieri, C., & MacGregor, B. (2012). The
4.13 Technology (e-commerce) economics of commercial property markets. Routledge.
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impact on the value of commercial property. E-commerce will Effect of non-domestic rates on commercial property
cause a leak in the retail store as well as in other commercial rents: an empirical study. Journal of Property Valuation
properties. Nowadays, people tend to buy goods and stuff via and Investment, 14(4), 18-30.
online (e-commerce) instead of going to a retail store because [5] Cohen, J. P., & Brown, M. (2017). The Effect of
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click to buy something. In traditional commercial properties, e- Case Studies of Toronto, Ontario, Canada and
commerce technology will result in lower sales volumes, lower Vancouver, BC, Canada. In The Economics of Airport
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ACKNOWLEDGMENT of effects of access, traffic exposure, and frontage
The authors would like to thank the Ministry of Education of parameters on sale price of commercial real property in
Malaysia (MoE) and Universiti Teknologi Malaysia. This work Kansas. Transportation Research Record: Journal of the
was supported by a grant from MoE (Fundamental Research Transportation Research Board, (2556), 10-19.
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