Karl Finkelstein on Valuations in an Unprecedented Time
May 27, 2020
By: Paul Bubny, Connect Commercial Real Estate with Karl Finkelstein, Valbridge Property Advisors
With the COVID-19 pandemic and resulting state-ordered lockdowns creating an operating environment like none other in living memory, real estate professionals find themselves navigating unfamiliar territory without benefit of a map. A case in point is valuation, especially in terms of determining future values: what formula can you employ when the near-term economic outlook comes with so many unknowns? Karl P. Finkelstein, senior managing director at Valbridge Property Advisors, describes the methods his firm is using to address that question.
Q: In working with clients amid the current environment, what are some of the key questions you and other Valbridge professionals are asking with regard to valuing specific properties?
A: For us, a careful market analysis is critical, especially now. In general, all of our values reflect market participants’ anticipation. So the question our appraisers have to answer is “What does the market think the value is?”
When attempting to answer the above question, here are some questions we are asking:
• What’s happening with active escrows?
• Are buyers backing out?
• Are sellers holding off on listing properties? Reducing prices? Offering concessions?
• What are trends with days-on-market?
• What are brokers hearing?
• Are tenants renewing leases?
• Are businesses closing and vacating?
• Are vacant spaces getting leased or remaining vacant?
• Are developers going ahead with development plans, or putting them on hold?”
Q: What questions and concerns are clients raising? How are you helping them arrive at answers?
A: Other than the obvious, “what is the property worth?”, they are also asking us to dig into market and property specifics:
• What is the current state of the property (observations from physical inspections, tenant vacancies, etc.)? Many clients want to know what is happening with their (either from lending, managing or owning) property on the ground.
• What were the market dynamics prior to the onset of the crisis, and what were / are the long term projections for the market (e.g., multi-family, industrial)?
• What are the near-term effects of the crisis on their properties’ values?
In line with the answers for above (question #1), we are:
• Performing good research by talking to market participants
• Performing good analysis of whatever data is available
• Providing good market analysis write-up in the appraisal report
• Acknowledging the Date of Value requested.
We have developed a new analysis product that we are rolling out in May to assist clients with existing property concerns. Working in conjunction with Moody’s Analytics, Our Risk Analysis tool will help clients get a handle on the current physical conditions of the property, as well as up to date market conditions that we can share in a SWOT style analysis.
We are also conducting market participant surveys nationwide so that we can help the appraisers in our local offices get some insight into what participants are seeing, hearing and thinking about the various markets.
Q: In an uncertain environment such as this, how do you reach clarity on determining values? What are some principles that would apply regardless of what kind of market we’re in?
A: The reality is that during an event like this, there may be few if any truly comparable sales to support a value opinion. So it is imperative that additional data be taken into consideration. This may come from experience, either measured in years in the business (grey hair) or having lived and appraised in a crisis (Hurricane Katrina).
Good market analysis is the key to determining value, regardless of what kind of market we are in.
Q: To a certain extent, valuations need to be taken on a property-by-property basis. Is this more true now amid COVID-19, less true or just as true as at any other time?
A: Real estate valuation has always been property specific – whether considering physical characteristics of a building or its tenant mix, or its zip code. All valuations should be considered on a property-by-property basis.
In light of the coronavirus, the impacts on property types will again be property specific. Obviously, the hit to lodging properties has been substantial. But on the other end of the spectrum are grocery stores, which have seen sales jump over 15 to 20%. Similarly, retail in general – including restaurants and bars – has been hurt from the virus. But single-tenant, credit tenant retail properties (Dollar Generals, etc.) have held their own and in some markets have seen an uptick in demand. So valuations are truly taken on a property-by-property basis.