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Professionals involved in commercial real estate – including investors, brokers, lenders, appraisers, and lawyers – need to understand the current value of assets. While benchmark data can be useful, it is not always available or relevant to a particular market. Commercial real estate professionals need to be able to calculate valuations that don't rely solely on historical data, especially during uncertain times. Appreciations are based on five appraisals:
- Certain properties are inherently difficult to analyze. In a robust market, extensive data from comparable sales can help determine benchmark numbers for cap rates, discount rates, and sales prices per square foot. However, such information is not available in smaller markets or for properties less than $ 2.5 million in value.
- Historical data is not a valid indicator of future performance. COVID-19 has rendered a lot of information worthless, so CRE experts have to ignore a lot of what happened before 2020. Instead, they should rely on forward-looking analysis and current market status. For example, a hotel property may look very different today than it did before the pandemic.
- Asset types and locations are important. Geography has always been key to determining the value of a real estate asset, but COVID-19 has made the type and location of the asset even more important. For example, as interest in suburban markets has increased, recognizing this variability is critical to predicting the future value of a property.
- The future performance influences the present value. The most accurate assessments are determined based on current and forward-looking analyzes. When you know what an asset is worth today (the acquisition cap), you need to consider how it will perform in the future (discount rate). The same hotel property mentioned above is likely to appreciate in value as COVID-19 vaccination rates rise. Estimating the performance of an income generating property over time and applying an appropriate discount rate to those estimates adds credibility to a valuation.
- The future is uncertain. With COVID-19, everyone had to set and reset expectations. For real estate, an asset must be valued in a row.
These tips come from the CCIM Institute's “Creating Reliable Assessments” course. Visit ccim.com/education for more information.