M id A tlantic Real Estate Journal — Spring Preview —April 23 - May 20, 2021 — 5C
www.marej.com
A ppraisal
By Jay White, Apex Realty Advisory Appraisal Clarity Returning in 2021
T
he COVID-19 pan- demic created market volatility, ambiguity,
also be different impacts on various property types and geographic areas as a result. Additionally, underwriters and appraisers need to look at the stability of property cash flow in terms of ten- ant exposure, credit quality, lease renewals, and short- term rollover risk in light of lower effective market rents and/or rising operating costs. Appraising commercial real estate during a pan- demic is strenuous, but not insurmountable for MAI des - ignated appraisers. Many in- vestors are faced with uncer- tainty of how to underwrite
risk and return rewards. However, when market fun- damentals become clearer and cash flow streams more predictable, then risk can be better underwritten. Histori- cally, recessions have been very good times to invest in hard assets like real estate. As some commercial real es - tate sectors have been more resilient than others, inves- tors will continue to focus on assets like industrial and multifamily; however, alter- native investments like net- leased assets, cold-storage warehouses, data centers, and self-storage facilities are
gaining favor. Commercial real estate pricing overall remained stable during the pandemic due to the lack of distressed sales. Most sellers refused to sell in a perceived down market while the histori- cally low cost of debt buoyed most owners. Property prices remained stable during the latter part of 2020. Investor demand rebounded after the easing of lockdowns due to the cheap cost of debt produc- ing high premiums between mortgage rates and acquisi- tion yields. Real estate investor opti-
mism is fortunately rising and market pricing clar- ity is gradually appearing as vaccine rollout mounts. Increased employment, con- sumer mobility, and restored investor confidence all have 2021 looking much better comparatively. Clearly, the concepts of confidence, stabil - ity, and liquidity are key to maintaining healthy real es- tate activity. We all are wel- coming employment growth, pent-up consumer demand, and corresponding increased market activity in 2021. Jay White is president of Apex Realty Advisory. MAREJ
a n d c om - plexity. Giv- en the sud- den changes in the mar- ket, valuing commercial real estate p r o p e r t y became a
Jay White
challenge that vexed com- mercial real estate apprais- ers and investors throughout 2020. The pandemic threw the U.S. economy into a re- cession in the second quar- ter. As in past recessions, the number of commercial transactions declined, which then limited the number of comparable sales available for appraisers to utilize. However, the cause of this recession was an extraneous shock, very different from previous recessions as it was more akin to a natural disaster. The pandemic caused ten- ants to request shorter-term leases and rent reductions while others sought alter- native types of forbearance. Landlords faced fading lease renewals, lower effec- tive rents, and increasing operational costs to ensure the safety of tenants and compliance with health regulations. All of these factors placed downward pressure on property cash flows and negatively im- pacted property values. The duration of these trends is a very important component to consider as real estate is a longer-term hold. The “art” of real estate appraisal is primarily based upon analyzing market data. The lack of recent market sales evidence has required appraisers to spend more time onmarket due diligence, outreach, and discussions regarding local market com- mentary. Market conditions in 2020 were too fluid to rely on monthly, quarterly, or an- nual sales reports to support opinions on the health of cur- rent property fundamentals and values. When things fall out of equilibrium, estimating mar- ket value becomes more difficult and creates “ap- praisal lag” that may take several quarters, if not lon- ger, before a clearer market picture emerges. There will
Jay L. White MAI, CRE® 101 Brandywine Boulevard Wilmington, DE 19803
P: 302-479-5300• F: 302-397-2403 www.apexrealtyadvisory.com
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