Contributed by DANIEL LESSER , LW HOSPITALITY ADVISORS
PERSPECTIVE
How to appraise hotel real estate in today ' s oscillating market
A
recent newsletter circulated by a commercial real estate advisor ( who shall remain nameless ) stated :
" Property valuations will be all over the map as appraisers continue to use historic data and cap rates in a fast-moving and uncertain market . Appraisers are seriously concerned about their ability to provide accurate valuations in the coming year . Typically , their analysis looks back over 12-18 months for sales and rental comps , but with the current fluctuations in interest rates , discount rates and terminal cap rates , it ' s impossible to arrive at a solid number . While it is still a best guess , the feeling in the market is to do more frequent broker opinion of value ( BOV ). Brokers have a slightly forward-looking perspective as well as a more boots-on-the-ground understanding of the micro-property comps for a specific market ."
Wrong : With more than 40 years of broad real estate advisory experience that includes conducting thousands of property valuations of all types of lodging facilities throughout the nation , in my opinion , nothing can be further than the truth . Any appraiser worth their salt accurately reflects the current actions of market participants .
No different than institutional commercial real estate investors that acquire income-producing assets , a sophisticated appraiser will prepare a discounted cash flow ( DCF ) analysis for an assumed holding period . DCF analysis requires forecasting , which is regarded as the basis for rational business and / or investment decision making . Like a meteorological agency utilizing data to predict the weather , an appraiser forecasting employs historical facts and information to make reasoned estimates about the direction of future trends .
In a fast-changing world , uncertainties and risk are inherent in all forecasts . Uncertainty is difficult to manage , but uncertainties can be converted into known risk . When risk is understood , it can be categorized , mitigated , managed , hedged , or even avoided . Uncertainties require continual review to identify changing facts and circumstances that affect risk . While business forecasting will always be critical to making well-founded decisions , it is important to be cognizant that predicting the unpredictable is to some extent a crapshoot , and that accurate forecasting is based in part on art and science , and mostly experience . In a nutshell : E Property valuations should not be “ all over the map ”... as appraisers do not make markets . Rather , appraisers determine from available market data what is the most likely price an asset would transact for in the open market . While the value opinion of individual appraisers may vary , the same holds true for brokers .
E Sophisticated appraisers are no more “ seriously concerned about their ability to provide accurate valuations in the coming year ” than are market participants including buyers , sellers , lenders and brokers .
E It is not typical for an appraiser ’ s analysis to merely “ look back over 12-18 months .” If the market “ looks back over 12- 18 months ,” then an appraiser is obligated to do the same . If , however , the market prices assets on a “ forward-looking perspective ,” an appraiser must reflect the actions of market participants and do the same .
E If , in fact , “ current fluctuations in interest rates , discount rates and terminal cap rates , ( renders ) it impossible to arrive at a solid number ,” the challenge in rendering a credible opinion of value is faced by not just appraisers but also market participants including buyers , sellers , lenders , and brokers .
E Though it may be correct that some “ brokers have a slightly forwardlooking perspective as well as a more boots-on-the-ground understanding of the micro-property comps for a specific market ,” it does not imply that an appraiser does not also implement a “ forward-looking perspective as well as a more boots-onthe-ground understanding of the microproperty comps for a specific market .”
40 hotelsmag . com May 2023