What is Price Per Square Foot?
The Price Per Square Foot (PPSF) is the ratio between the market value of a real estate property and its corresponding total square footage.
Since the price per square foot (PPSF) is a standardized measure, the ratio can be used for purposes of comparability – albeit, the PPSF ratio should not be used as a standalone metric considering the shortcomings of the metric.
- What is Price Per Square Foot?
- How to Calculate Price Per Square Foot (PPSF)
- Price Per Square Foot Formula
- Price Per Square Foot Calculator
- Price Per Square Foot Calculation Example
- Average vs. Median PPSF: What is the Difference?
- What Factors Affect Price Per Square Foot?
- U.S. Residential Market: Average Home Price by Size
- How to Analyze Price Per Square Foot
- Price Per Square Foot in Commercial Real Estate (CRE)
How to Calculate Price Per Square Foot (PPSF)
The price per square foot ratio, often abbreviated as “PPSF,” is a common metric used by real estate practitioners and homeowners to compare the current value of individual properties or the collective valuation of properties in a given market.
- Property Analysis → One practical use-case of the price per square foot metric is analyzing the historical trend and patterns in the property value or understanding the cost structure of a value-add or developmental real estate project to determine its economic feasibility.
- Market Analysis → The price per square foot ratio can also be used to measure market trends either at the macro-level or location-specific. The compiled PPSF market data is expressed on either an average (or median) basis.
Calculating the price per square foot metric is straightforward, as the ratio is determined by dividing a property’s market value by its total square footage (sq. ft.).
The steps to calculate the price per square foot (PPSF) are as follows.
- Determine the Purchase Price of the Property (Fair Market Value)
- Measure Total Square Footage (Length × Width)
- Calculate Price Per Square Foot (Property Price ÷ Total Square Footage)
The process can be repeated for comparable properties located nearby to analyze the market as a whole, rather than on an individual basis.
Price Per Square Foot Formula
The formula to calculate the price per square foot of a property divides the property’s market value by the total square footage.
Where:
- Property Sale Price → The property’s purchase price or market value as of the present date. The property’s current market value is far more common in usage since the fair value is reflected. However, the percent differential between the purchase price and market value should be marginal, barring unusual circumstances (e.g. a “fire sale” or an outsized purchase premium).
- Total Square Footage (sq. ft.) → The total square footage of the property or the rentable area if applicable to the scenario (e.g., tenant in a shared rental building).
For example, if a residential property with 5k square footage in space is sold in the market for $600k, the price per square foot is $120.
- Price Per Square Foot (PPSF) = $600,000 ÷ 5,000 sq. ft. = $120 per sq. ft.
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We’ll now move to a modeling exercise, which you can access by filling out the form below.
Price Per Square Foot Calculation Example
Suppose we’re tasked with calculating the median price per square foot (PPSF) for four comparable commercial office buildings located in Manhattan, New York.
The four office buildings are each Class B properties with comparable tenant profiles, occupancy rates near full capacity, and rent prices at the market rate.
For the sake of simplicity, we’ll assume that the collected market data set was adjusted and normalized (”scrubbed”).
| Manhattan Commercial Market | Sale Price | Square Feet (sq. ft.) | Price / Sq. Ft. |
|---|---|---|---|
| Office Property A | $720k | 400 sq. ft. | $1.8k |
| Office Property B | $900k | 600 sq. ft. | $1.5k |
| Office Property C | $850k | 500 sq. ft. | $1.7k |
| Office Property D | $780k | 650 sq. ft. | $1.2k |
The column on the far right calculates the price per square foot (PPSF) for each individual property sale.
- Office Property A – PPSF = $720k ÷ 400 sq. ft. = $1.8k
- Office Property B – PPSF = $900k ÷ 600 sq. ft. = $1.5k
- Office Property C – PPSF = $850k ÷ 500 sq. ft. = $1.7k
- Office Property D – PPSF = $780k ÷ 650 sq. ft. = $1.2k
Truly comparable properties should expect to exhibit relatively similar PSF metrics, assuming that the selected peer group and market data were analyzed diligently to normalize the data set as deemed appropriate.
Of course, wide deviations can sometimes occur, but those are normally anomalies that stem from internal operational issues instead of market issues.
Since the price to square foot (PPSF) metrics have been determined for each office property, the final step is to use the “MEDIAN” function in Excel:
The median price to square foot (PPSF) for our data set on office building properties in Manhattan equals $1.6k.
Average vs. Median PPSF: What is the Difference?
- Median Price Per Square Foot (PPSF) → The median price per square foot is the mid-point of all the property prices in the data set. Said differently, approximately half of the peer group is priced above the median price, while the bottom half is priced at a lower value. Similar to performing comps analysis in the context of corporate valuation, the median is preferable for larger-sized peer groups to mitigate the risk of an outlier skewing the market data.
- Average Price Per Square Foot (PPSF) → To calculate the average price per square foot, the cumulative price per square foot of all properties is divided by the number of properties. Unlike a median, the average PPSF data can be skewed by outliers in the data set, which can easily distort the output. Therefore, the average should only be used for peer groups with only a handful of comparable properties, and the pricing variance is insignificant.
What Factors Affect Price Per Square Foot?
In practice, the price per square foot ratio (PPSF) is widely used in the real estate market as a “back-of-the-envelope” method to obtain a general sense of the pricing of a property (or specific market).
However, real estate valuation is a complicated subject, to say the least, and the internal and external variables that can influence the value of a property are unquantifiable.
- Property Location → City, State, Neighborhood, Safety, Reputation, Schools, Universities, Food Markets
- Property Features → Bed-Bath Count, A/C System, Swimming Pool, Dishwasher, Backyard, Garage, Washer-Dryer
- Condition of Property → Value-Add Improvements, Renovations, Current Structural Conditions
- Construction Material → Building Costs Concrete, Flooring, Roofing, Insulation, Interior/Exterior Frame
- Market Trends → Current Buyer Demand – e.g., Miami Post-COVID
- Economic Conditions → Seasonal and Cyclical Patterns, Recession Risk, Credit Markets
The factors listed are not reflected in the PPSF ratio (or are implicitly factored in), which is insufficient and lacks the depth required.
Therefore, the price per square foot metric offers an initial “ballpark estimate” of the relative market value and cost efficiency of properties.
However, other metrics must be paired with the PPSF ratio for a more comprehensive understanding of the factors influencing the property value.
U.S. Residential Market: Average Home Price by Size
In the U.S. residential real estate market, the average cost to construct a new house is near the proximity of $150 per square foot, while the average size of new homes constructed is in the 2k to 2.5k square feet range.
However, the average price is expected to rise in 2024 from the rising cost of building materials, which many market participants anticipate will cause home prices to spike (and new construction activity to decline).
| U.S. Market – House Size (Sq. Ft.) | Average Price Range |
|---|---|
| 800 Sq. Ft. | $80,000 – $160,000 |
| 900 Sq. Ft. | $90,000 – $180,000 |
| 1,000 Sq. Ft. | $100,000 – $200,000 |
| 1,200 Sq. Ft. | $120,000 – $240,000 |
| 1,500 Sq. Ft. | $150,000 – $300,000 |
| 1,600 Sq. Ft. | $160,000 – $320,000 |
| 1,800 Sq. Ft. | $180,000 – $360,000 |
| 2,000 Sq. Ft. | $200,000 – $400,000 |
| 2,500 Sq. Ft. | $250,000 – $500,000 |
| 2,700 Sq. Ft. | $270,000 – $540,000 |
| 3,000 Sq. Ft. | $300,000 – $600,000 |
| 4,000 Sq. Ft. | $400,000 – $800,000 |
| 5,000 Sq. Ft. | $500,000 – $1,000,000 |
“How Much Does It Cost To Build A House In 2023?” (Source: HomeAdvisor)
How to Analyze Price Per Square Foot
In general, the utility of the price per square foot metric as used to perform comparative analysis is constrained to a “back-of-the-envelope” estimate of the market value of a given property.
Simply put, there are far too many variables that can distort the metric, causing the ratio to be unreliable.
Therefore, the price per square foot ratio is a standardized metric, albeit a mere ballpark figure on the market pricing of a particular property.
For example, comparing the per-unit pricing of a Tesla Model 3 and a BMW i7 based on just two variables – the price and size – is unreasonable to state the obvious.
Why? Countless factors influence the decision of buyers beyond the per-unit price (and the perceived value of the vehicle is an implicit variable considered in the decision).
Likewise, the same concept applies to property appraisals and performing valuation analysis on specific real estate markets.
However, the prior statement is not intended to insinuate that the price per square foot should not be used to compare properties.
Rather, the limitations of the ratio must be understood beforehand to avoid the risk of misconstruing the collected market data (and arriving at misguided conclusions).
On that note, the shortcomings of the price per square foot metric are, in fact, where some of the more practical insights can be derived.
The price per square foot metric should be viewed as preliminary “signals” pointing toward the factors of the current prices ascribed by the market on certain properties.
Once the price per square foot of individual properties (or the average pricing rates in a specific location) is gathered, the next step is to perform in-depth diligence to identify the underlying causes for the variance in market pricing or recent trends.
Price Per Square Foot in Commercial Real Estate (CRE)
In the commercial real estate (CRE) market, real estate appraisers often analyze the price per square foot to estimate a property’s fair market value (FMV).
However, as mentioned earlier, the PPSF is only the starting point of the valuation analysis.
- Sales Comparison Approach → The sales comparison approach is based on the premise that the value of a property can be derived from prior sales of similar properties.
- Cost Approach Appraisal Method → On the other hand, the cost approach appraisal method estimates the value of a property based on quantifying the cost of reconstructing the property (i.e., the replacement cost is a proxy for the property value).
The price per square foot (PPSF) frequently appears in the two appraisal methods. However, the granularity of the analysis and discretionary adjustments applied is the differentiating factor that causes the implied value to be credible.
In the absence of such market research and adjustments, the PPSF ratio is misleading and certainly not reflective of the relative valuation of a property.
Compared to homeowners, commercial real estate (CRE) investors, commercial lenders, and appraisers have access to more tools and market data for such analysis even to be an option.
For instance, a property feature such as the quality of the flooring and perceived market demand on that specific feature could be an adjustment factor (and drilling down on these sorts of discrepancies is necessary, not optional, for the credibility of the implied valuation).
In closing, the price per square foot can draw attention to factors that can contribute toward a better understanding of the market value of a property. But by itself, the PPSF ratio as a standalone metric should not be relied upon for any analysis beyond fetching a general sense of the property value and cost.
