Real estate: Where’s the value today? Featured

7:00pm EDT December 26, 2007

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 Jerry.Gisclair@cbre.com.