Appraising Commercial Real Estate in Turbulent Times

One of the questions that I am most often asked by appraisers or their clients is "what is going on in the market?" The market that they are asking about may be the entire economy, a submarket area or the market for a specific property type like industrial buildings, retail buildings or extended-stay motels.  They can also ask about something even more specific, like the market for small office buildings in the southwest submarket.  Generally they always want to know how the latest round of financial impacts, up or down, have affected their property value.

Using statistical data published by real estate brokers, title companies and analytic services appraisers can answer these questions. Check the most recent reports look for the property type and submarket and voila, you can state with some certainty that the vacancy rate is X percent and the average rental rate is Y dollars per month.  The studies do not tell you anything about a specific property but it does give you some guidance regarding sales prices and rental rates based on competition.  Other sources of market data provide capitalization rates, planned projects, projects that have permits and replacement cost information.

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 financing has changed 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 of sell 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 you is not the same as it once was.

2012 Update: The Las Vegas real estate market is still in turmoil, so here we are as appraisers 4 years later dealing with a continuation of the 2008 Recession.  Sales activity is still anemic and many are amazed when they get an appraisal report that tells them that the value of their real property assets are a fraction of what they once were.  For some its great to be able to convey their property without being afraid of the tax implications for others.

For more appraisal information contact Glenn Rigdon, MA,MRICS, ASA a Las Vegas / Henderson Nevada appraiser via email or via his business website Horizon Village Appraisal (http://www.horizonvillageappraisal.com), or you can also click on “Contact Us” on the home page of this website. 

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