By Mark Polon , CCIM
CREATING VALUATIONS AMID UNCERTAINTY
In today ’ s climate , estimating an asset ’ s current and future worth is tricky but far from impossible .
Benchmark valuation data is great , but not
always readily available or relevant to your market . Because investors , brokers , lenders , appraisers , servicers , receivers , lawyers and the courts consistently need to understand the current value of an asset , it is important for all real estate professionals to know how to provide valuations that do not rely solely on historical data .
Establishing the correct value for an asset to be sold , or space to be leased is the most important aspect of any transaction . The key to understanding an asset ’ s value is the relationship between the asset type , its geography , and the current commercial real estate cycle .
But in creating valuations that are reliable in a time of unprecedented uncertainty , commercial real estate professionals must not dwell in the past . We are in an economic recession coupled with a public health crisis like the United States and the world has not seen in at least a century .
Part of producing the best possible forecasts is understanding what the next economic cycle may look like . Here , it ’ s a bit of alphabet soup . We have four general options , each with distinct implications for commercial real estate :
• V-Shaped Recession : A short , single drop with economic activity picking up relatively quickly .
• W-Shaped Recession : A double-dip recession that includes a second contraction after an initial recovery .
In creating valuations that are reliable in a time of unprecedented uncertainty , CRE professionals must not dwell in the past .
• U-Shaped Recession : An extended period of economic strife with unemployment and inflation becoming long-term considerations before a marketed recovery .
• L-Shaped Recession : An economic shock that leads to a long , slow , but steady recovery ( with the Japanese recession of the early ‘ 90s as an example ).
In understanding how to develop reliable valuations in the age of coronavirus , here are five assumptions that are key to establishing current and future worth for real estate assets of all types .
Premise 1 : Certain properties are inherently difficult to analyze . In a robust market , substantial data from comparable sales can help determine benchmark numbers for cap rates , discount rates , and sale prices per square foot . But such information isn ’ t available in secondary and tertiary markets or for properties valued below $ 2.5 million simply because there are fewer of them .
Premise 2 : Historical data is no longer valid as an indicator of future performance . COVID-19 has made a lot of information worthless . Our current situation cannot be compared to a bullish or bear market that we ’ d expect to see in anything resembling normal times . The sheer disruption to the commercial real estate market requires professionals to ignore a lot of what happened before 2020 . The downturn has been abrupt and not inherently based in economic issues .
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE FALL 2020