CRE appraisals: Imagineering gradually gives way to reality. / What if all the sales are distressed?
“There’s a lot of money and control rights at stake, all depending upon the appraiser’s determination [of CRE value].”
“So you can imagine the pressure.”
Joseph Cioffi
chair of the Bankruptcy, Creditors' Rights and Finance Practice Group
Davis+Gilbert LLP
via Bisnow
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Valuation freefall?
“An aging [office] building stock, financing challenges and a rush to Class-A space mean the values of second- and third-tier offices appear to be in freefall.”
“The tendency to inflate values and for appraisers to lag current market conditions because of a reliance on historical data may be prolonging the market’s state of limbo.”
Bisnow
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“Cushman & Wakefield Senior Director of Valuation and Advisory Trevor Chapman said he has seen some office values drop 70% from their last purchase price.”
“When loans get close to going into default and banks think that value might be under the actual mortgage amount, they require either quarterly or even monthly valuations just to keep track because they can't lend any money if they're underwater on their other loans.”
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The art of imagineering.
From Norm Miller University of San Diego business professor:
“There are appraisers who will use data not to lie so much as to skew and bias results. Some of them are optimistic about the market, some of them are pessimistic.”
“Banks want to forestall defaults and don’t want to own or operate buildings.”
“And so you can find appraisers whose inclinations match up with what you want.”
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“In 2024, there is going to be a very big difference between the reality on the ground and what appraisers say is happening.”
Harsh Hemnani, CFA, CAIA
Green Street
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What if all the sales are distressed?
“And if all the sales are distressed, that might create its own comps challenge.”
“Trevor Chapman said he had heard of a broker talking about going to “price per pound,” meaning just a low cost per square foot, say $60 per SF for a building that may cost $500 per SF to build. In this case, it is a land banking play.”
“These distressed sales can really drive down market value across the board, he said. But it is also a matter of time before too many distressed sales become the actual market.”
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“Two, three sales, that’s not the market, some might say.”
“But when you start getting to eight, 10 sales, you can’t call them distressed anymore.”
Lance W. Dore, FRICS, MAI, RICS Registered Valuer president The Doré Group