Posted by Jonathan J. Miller -Sunday, May 3, 2009, 7:57 PM
Guest Appraiser Columnist:
Martin Tessler, CRE
Fee Simplistic is a regular post by Martin Tessler, CRE whom after more than 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. Marty has never been accused of being a man of few words and his commentary canâ€™t be inspired on a specific day of the week. View his earlier handiwork on Soapbox.
Having recently attended the Counselorâ€™s of Real Estate (CRE) Mid-Year Conference at the Waldorf Astoria I came away with one speakerâ€™s astute findings on where the market is likely heading. Robert White, Jr. CEO of Real Capital Analytics wins the cigar for the most astute commentary on where we are in the marketplace and for not belaboring the obvious: * US commercial property prices are down 21% from â€˜07â€™/08 peak to October â€™05 pricing levels * Sellers are adjusting slowly to pricing changes while investors are in no hurry to buy * Banks are not dumping REO assets as it would jeopardize their capital base * Troubled assets are increasing by $6-$8 billion monthly in foreclosures but deeds are not changing hands due to capital base problem * Sales are rare but offerings are growing as sellers head toward distress
What does this mean to the appraisal world and how are we to gauge the market in the absence of sales and financing?
One must take into account that we are readjusting to a frenzied market that extended over many years fueled by easy credit and low interest rates. A new market reality will be evolving over time (if it is not already underway) that will replace the mindset created by the financing bubble best summed up by an article in the Wall Street Journal of April 6th entitled, â€œFrom Bubble to Depressionâ€.
In the article the authors note that â€œBubbles can arise when some agents buy not on fundamental value but on price trend or momentumâ€ (emphasis added). There is no question that the market through mid 2007 acted in this manner and appraisers were ethically and legally bound to implement this reportage in their valuations.
What this portends to the appraisal world is that valuations stemming from discounted cash flow analyses is that most emphasis will be placed on income in place compared to projected income based on assumptions of growth in rents or lowered cap rates.
The caveat to appraisers is: â€œwatch those assumptionsâ€.
It will no longer be: â€œtell me the value you need and Iâ€™ll tell you what assumption you need to get thereâ€.