Changes underway in the debt market
are unquestionably having an effect
on the value of real estate. The result can be positive or negative depending on a
variety of circumstances. As an investor for
either the short or long term, it is critically
important to be current on the value of the
asset in today’s market.
“Right now, we are in the most dynamic
and fluid real estate market of the last 10 to
15 years,” says Jerry Gisclair II, MAI,
Managing Director — Florida for CB
Richard Ellis Valuation & Advisory
Services Group. “As such, third-party
appraisals are imperative to ensure property owners are taking the right steps to realize optimum return on their investment.”
Smart Business talked with Gisclair for
his insight on the current real estate market and why current valuation updates are
important.
What effect is the current debt market having
on real estate values?
The current debt market does not offer
the same high-leverage programs so evident in 2005 and 2006. Today, we see deal
structures that require stricter underwriting, higher equity requirements and subsequently lower loan to value debt percentages. The result is a shift to those buyers
and lenders who prefer lower leverage and
who have been somewhat shut out of the
market by the more aggressive, highly
leveraged entities of the past few years.
While the reality and the on-going anxiety
of the subprime market has become evident in the residential sector, we have seen
only minor impact to commercial properties. Aside from market to market
strengths and weaknesses, the fundamentals in the commercial sector remain in
check and quite healthy.
So, is this good or bad for values?
It depends. Repricing certainly had been
expected under these conditions, and we
are seeing this come to fruition for highly
leveraged properties where buyers paid
top dollar. A good example is land, where
prospective residential or high rise condo developments caused prices to soar. On
the other hand, quality assets are still experiencing strong demand but are now being
pursued primarily by investors with the
capacity to bring a higher equity component to the transaction. As such, the
changes in the debt market are somewhat
mitigated. Additionally, the change in the
value of the dollar is encouraging to foreign
investor interests, who see a two-fold
advantage in a real estate play and a long-term hedge that the dollar will recover,
causing an arbitrage of sorts on their currency.
Are appraisals needed then for other than
buying and selling real estate?
Certainly. Current appraisals are also
important for annual reporting to fund
managers, private investor groups, for
some Sarbanes-Oxley compliance cases
and to assist with tax planning and
FASIBE 141 compliance. A third-party
appraisal accompanied by a proper cost
segregation analysis can help structure
depreciation schedules that can potentially result in significant federal tax savings. A current appraisal can also help in
evaluating the true potential of a property and what steps can be taken to
achieve that added value.
What should be considered when choosing
an appraiser?
It is important to interview the appraiser
to make sure he or she meets your particular needs. Your appraiser should be adept
at analyzing financial statements and properly weighing risk/return amongst different
property types. He or she should have the
necessary resources and a sound understanding of current market conditions to
ensure a valuation at a specific point in
time. What was happening 15 months ago
is relevant but not necessarily applicable
today.
If you have properties in multiple markets, both nationally and/or multinational-ly, it would be very helpful to work with a
company that has the presence to bring
demonstrated local expertise to each.
While the real estate itself remains subject
to a variety of local influences, the
approaches and methodology to value are
much more consistent. As such, the best of
both can be enhanced through a single
source provider.
Do you have any other advice for those in the
real estate market?
Treat any investment as though you are
going to hold it for at least three to five
years, regardless if it is a residential or
commercial property. Consider the cost to
enter, alternative investment options, current valuation, long-term goals and, of
course, the cost to exit. Some of the problems on the residential side occurred
because the real estate was simply treated
as being much more liquid than it really
was. This applies to the land purchases for
residential development and the home
buyer.
JERRY GISCLAIR is the Managing Director — Florida in the
Valuation & Advisory Services Group of CB Richard Ellis in
Tampa. Reach him at (813) 261-4510 or by e-mail at
[email protected].
