Valuation Methods for Commercial Real Estate Investment

As a portfolio manager at a firm specializing in alternative investments, you have been tasked with evaluating a potential investment in a commercial real estate property. This property has recently been appraised at $5 million, but market conditions have shifted since the appraisal was conducted six months ago.

The previous owner utilized the income approach for valuation, which predicted a net operating income (NOI) of $500,000 per year based on tenant leases and projected rent increases. However, due to recent changes in the local economy and increased vacancy rates, you believe a more comprehensive valuation is required.

In your response, explain the various real estate valuation methods available to assess the current value of the property, including the income approach, sales comparison approach, and cost approach. Discuss the advantages and disadvantages of each method in the context of the current market conditions. Additionally, propose a recommended valuation method for your firm to use in this scenario, justifying your choice based on critical factors you identify.