Office Property Appraisal in Milan: Property Description and Market Analysis
Book: Commercial Property Valuation: Methods and Case Studies
Authors: Giacomo Morri, Paolo Benedetto
ISBN: 9781119512127 (hardback), 9781119512134 (ePDF), 9781119512158 (ePub)
Chapter 9 is where the book stops talking in general terms and starts doing real work. The case study is a partially leased office building near central Milan. No real name, but realistic numbers. The goal is a full Discounted Cash Flow Approach (DCFA) application covering time horizon, cash flows, terminal value, and discount rate.
This post covers the first half: property description, method choice, and market analysis. Part 2 handles the actual valuation math.
The building
The property sits in a regenerated former industrial zone. The masterplan includes other offices, hundreds of residential units, and a shopping centre. Location is strong: public transport, parking, services nearby. Railway station about 1.5 km away. Motorway junction about 5 km.
The building is roughly ten years old. Reinforced concrete structure with continuous glass facades. Basement holds archives, storage, and parking. Five identical open-plan floors above ground. Central stairwell and lifts accessed through ground floor reception. Each floor can run its own power system. Boilers and HVAC on the roof. Standard fire safety systems.
The numbers that matter
Total Net Lettable Area: 19,350 sqm across four tenants plus vacancy.
Weighted Lettable Area (after applying use-based weighting factors): 16,035 sqm.
Weighting factors used:
- Offices: 100%
- Storage/archives: 50%
- Uncovered parking: 10%
- Covered parking: 25%
The vacancy is the story. Two full floors (2nd and 4th) are empty. That is about 40% of the weighted lettable area. Total passing rent: roughly €1.82 million per year.
The rent roll
Four tenants (A, B, C, D) on different floors with different lease terms:
| Tenant | Passing rent (€/sqm/year) | Residual lease |
|---|---|---|
| A | 187.5 | 3.5 years |
| B | 180.8 | 5.5 years |
| C | 203.3 | 1.5 + 6 years |
| D | 182.8 | 4 years |
All leases index at 75% CPI. Three tenants are in their second six-year period.
Tenant C is the one to watch. Passing rent of €203.3/sqm is well above the other tenants and likely above market rent (ERV). When a tenant pays significantly more than ERV, they often leave at the first break option or expiry. Unless moving costs or strategic reasons keep them, the valuer should adjust future rent to ERV for that unit.
Why DCF and not direct capitalisation?
Offices are “flexible commercial properties.” Hard to compare physically. Easy to compare on income and yields.
The book’s decision tree from Chapter 6 asks three questions:
- Is the property fully leased?
- Are rents in line with ERV?
- Does the building need CapEx?
For this property: 40% vacant, re-leasing takes time and money, and some adaptation work is needed. DCFA wins.
Income capitalisation methods are the right family. Within that family, DCFA handles the vacancy timeline and leasing costs that a simple cap rate would bury.
Market analysis
National trends are referenced but not shown. The local office market is the focus.
Investor side: Prime class A buildings with top tenants still attract buyers. But supply is thin. Investors seeking higher returns are moving to secondary locations with good transport and solid tenants.
Tenant side: Demand exists but tenants want energy-efficient buildings with low operating costs. Demand is softer than previous years. Leasing takes longer.
Finding ERV
The valuer surveyed brokers and pulled six recent lease comparables in the same area. Passing rents ranged from €176 to €194 per weighted sqm per year. ERV estimate: approximately €185/sqm/year.
Finding the cap rate
Four comparable sales produced gross yields between 6.92% and 7.11%. Average: around 7% on gross rent.
Net yield could not be calculated because operating cost structures for the comparables were unknown. So the going-in cap rate starts at 7% gross.
What I found interesting
The weighting factor table is a good reminder that “rent per square metre” is never as simple as it looks. A floor with lots of parking and storage counts differently than pure office space. Two buildings with the same gross area can have very different weighted areas.
The tenant C situation is something you see in real portfolios all the time. A tenant who signed a lease years ago at a high rent looks great on the rent roll. But if market rent has dropped or their business has changed, that income is not sustainable. Good valuers flag this early.
The 40% vacancy rate is why this case exists. A fully leased building at market rent might get valued with direct capitalisation in half the time. The DCF model earns its keep when cash flows are messy.
In Part 2, the book builds the full cash flow model: 6.5-year horizon, vacancy assumptions, operating costs, CapEx, terminal value at 7.25%, and a WACC of 7.82%. The final market value lands at roughly €39 million.
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