Real Estate Market Changes - How Important are They?

Appraisers and real estate agents spend a significant portion of their lives watching changes in the national and local real estate markets.  There can be a relatively large disparity between sub markets like the retail market segment and the industrial market segment in the same city or county.  Market changes within each of the segments are usually tracked every few months, or per quarter, and published by a number of competing brokerage firms.

Appraisers and brokers pay close attention to statistics / changes in market activity including but not limited to; employment, sales volume (total SF sold and number of sales), sales price per square foot (SF), new construction, the average rental rate per SF per month, the average direct capitalization rate and the average vacancy rate.

For most owners of real property small changes in price within their sub-market have no dramatic effect on the value of their real property.  Small cap rate changes and supply and demand changes can move property values up or down, and at times significantly, but often the changes are modest over a 3-month period.  So, an individual owner of for example, of a retail building will be affected by changing sub-market conditions but usually the changes will not significantly change value during the term of a short-term listing.

While market changes are important and often compelling evidence of market direction and anticipated value they are generally not what drives or motivates individual buyers and sellers.  It's like deciding to sell your home because the market value increased 5%, sure it happens, but most market participants do not make their decisions based on modest market changes in prices and most buyers and sellers of commercial property similarly are not making their decisions based modest market changes either.

It's my opinion that significant real property market moves are different.  A 20% increase in commercial real property values, even over a few years, can make many a property owner a millionaire regardless of how well his or her businesses is doing.  Some struggling to make a living will "pull the pin" and

take the six-figure windfall.  If an owner is doing well they may just look at it as a "paper profit" and console themselves with the fact that any new competitor will have to spend a great deal more money to enter the market.  The cost or real estate or rent becomes an effective barrier to new competition.

Falling real property values can be as brutal as any form of punishment to a commercial property owner, as those who have lived through the post-2008 real estate market crash learned first-hand.  Downwardly renegotiated lease terms effectively reduce market value.  Owners generally can’t however get rid of their debt when real property markets fall and then remain flat.  Returns on invested capital in real estate can become non-existent or simply future losses.

Real property analysts and agents are often fixated on current market conditions and future market trends while real property owners have to live daily (and over the long-term) with their past market decisions.  There may have been a great, recent market bump that has increased the equity positions of most owners in the entire city or county, but the owner that you are interacting with may still be down 80% from his initial acquisition price.

Market changes are important but they are relative to each owner and their circumstances.  Real estate booms can heal a lot of bad timing mistakes but during extended down markets the booms may not come that often.

If you have followed real estate markets for any extended period of time it occurs to you that you will likely live through only one to a few boom periods, so if you miss them or pass on your opportunity to sell into them you may not get another chance to benefit from them.

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

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