Appraising Commercial Real Estate in Turbulent Times

Appraising Commercial Real Estate in Turbulent Times
One of the questions most often asked of appraisers by appraisal clients is "what is going on in the market?" The market that they are asking about may be the market for industrial buildings, commercial office condominiums or extended-stay motels, but they always want to know how the latest round of financial disasters has affected their property value.
Using statistical data published by real estate brokers usually solves these types of questions. Check the most recent reports and look for the property type and sub-market and voila, you can state with some certainty that the vacancy rate is X percent and the rents are Y dollars per month. Other sources provide recent sales information and capitalization rates and sales prices per square foot are readily accessible.
The problem that appraisers are now facing in Las Vegas, Nevada and other cities is the fact that the data available for review via broker reports and past sales data sheets often does not take into account the major downturn that we have seen in the financial markets. The instability of the stock market, the inability of some relatively strong borrowers to secure financing and the evaporation of typical market conditions changes the future outlook for some properties.
So how do appraisers deal with a market that is changing so quickly? Additional market research is the answer. If there is some question about how strong the market for commercial office buildings is today, contacting brokers with commercial office building listings is a good place to start. If you ask principals and brokers about market activity they will tell you about their perception, and they are on the "front line" in the market. They can tell you how soft asking prices are, what concessions are being made to rent buildings and they can give you some idea of vacancy rates and rental rates.
Organizations that focus on specific markets, like office buildings, are often a great source for market information. Some of them collect data from their members and distribute it to the public while others sell access to the information. Either way, if you really need to know how the market is changing, this information can be valuable.
Bankers, mortgage loan officers, title company employees and others involved in the real estate business can also offer you insights without disclosing confidential information.
Since anticipation of the future sales price of real property is part of the appraisal process, appraisers must consider what the value of a property will be after a typical marketing period. If prices are falling, how much more will they fall before a sale will be transacted?
With market conditions in flux, appraisers have to go back to doing research the old fashioned way, by talking to market participants and brokers. Sales prices, rents, capitalization rates and all indicators of value have to be verified with consideration being given to what is anticipated and not what has past. If you are looking backward as an appraiser you realize the terrain in front of us is not the same as it once was.
The author, Glenn J. Rigdon, BS, BSCS, MA, ASA is a Realtor, a commercial broker and a commercial appraiser with 30 years of experience working in the real estate industry. Mr. Rigdon has held the position of Economist with the Arizona State Land Department and Staff Specialist - Legal with the Nevada Department of Transportation. See http://www.horizonvillageappraisal.com for more info.

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Appraising Commercial Real Estate in Turbulent Times

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Appraising Commercial Real Estate in Turbulent Times