Extreme Appraising: Valuing CRE in a Down Market

Are you really prepared to value commercial real estate in this rapidly changing market? The historic increase in Treasury yields is putting extreme pressure on cap rates and increasing investor yield requirements. Rates are likely to hold at current levels for longer than anticipated just a few months ago. CRE values will likely decrease over the next 12 months as cap rates respond and financing capital is hamstrung by debt service constraints. Rising vacancy rates and operating expenses are also negatively affecting net operating income, further hampering CRE values. Add to these dynamics the possibility that your subject property may be performing worse than the general market.

This seminar will address critical issues, often misunderstood even by experienced commercial appraisers, in valuing under-performing property in a declining market. 

The seminar will be based on a hypothetical case study property, a multi-tenant office building. The primary focus of the case study is to value the property “as is” and “when stabilized”, using all three valuation approaches, based on the following circumstances: 

1. The property is 50% vacant in a market experiencing 20% vacancy, thus necessitating the proper measurement of a RENT-UP ADJUSTMENT to be incorporated in all three approaches to value the property “as is”.
2. The market is forecast to experience on-going, but temporary, EXTERNAL OBSOLESCENCE based on a detailed fundamental market analysis, which will be demonstrated using current methodologies and also incorporated in valuations.

In addition, the case study property also incorporates two other issues that will need to be addressed in the valuations. 

1. One lease at the property was first negotiated when the market was much stronger. The rent for this lease was recently reduced and the term extended, in a so-called “blend and extend” renegotiation, but is still above market, therefore necessitating a “property rights adjustment”. 
2. Another lease includes an apparent higher than market rent due to substantial landlord provided concessions, therefore necessitating a measure of “effective rent” for purposes of forecasting the rent at the time of lease renewal.   

All of these issues will be discussed and then analyzed entirely in Excel, although attendees do not need to be an Excel expert to benefit from the seminar.