Most of the time this is a question most investors and buyers ask when considering purchasing commercial real estate. With construction and replacement costs being more and less the same throughout the nation (in most cases cost of materials and labor do not differ that much)and some influence by the local demand and supply, one may think there should not be a great difference from one location to the other. In fact replacement cost has an influence on the cost of an existing building. Furthermore, local demand and supply will put pressure on how much buildings are trading per square foot in a specific area. There are other factors such as environmental conditions and property characteristics and condition or physical obsolescence if present. But in commercial/investment real estate the most important factor to determine the actual value of a building is how much the asset can produce, either in income for an investor or use value for a user. When an investor looks at acquiring income producing properties, an income approach to value will have more weight than any other method such as comparison sales or reproduction cost and appraisers use it all the time. This is why you can see that recently a 15,000 sq ft shopping center in good condition with a large expected economic life sold in Broward County Florida for $3,525,000.00 or $235.00 per square foot and a retail space totalling 15,000 sq ft, in a very similar condition, sold on Broadway, New York City for $136,550,000.00 or $9,103.33 per square foot. Although it is very important to know replacement costs, recent sales, property and location conditions, all comes down to the internal rate of return of the investment over a specific holding period and the question is more how much it produces rather than what is the cost per square foot. One an analysis is performed on a specific real estate investment and the results make sense for the investor, then all other conditions should be analyzed, future growth in the area, future supply, future demand from users of this property type, demographic and market forces, government plans, environmental hazards and property condition to determine when and how much capital improvements will be required and how much reserves for replacements should be put aside. When we blend all these factors into our investment and financial analysis, if we achieve the required return for our investment criteria, we will move and purchase the property, most of the time not paying too much attention to what is the price per square foot.
