How to CRE Valuation in the Age of Coronavirus?


The covid-19 pandemic has caused great trouble. All the industries globally are suffering due to the ongoing situation. Real estate is no different. The real estate valuation or appraisal during the current situation undoubtedly has created challenges for everyone.

Talking about the turbulent economic period experienced during the 1980s, which was a National savings and loan crisis, the great recession, and 9-11, it is essential to emphasize the valuation operation to establish an opinion of value during this current situation.

In simpler words, there is a talk among the real estate professionals that the valuation of real estate must be considered as an art but not a science. It is because the valuation provides a credible appraisal. 

It is essential to carefully consider the valuation professional’s experience and qualifications who develops a given opinion of value. Real-estate operation is an art that requires great expertise that is gained by working with specific property types and markets.

The evaluation result may be presented as conservative or optimistic when the professional responsible for preparing it lacks sound judgment and expertise. Thus, it is essential to hire an experienced professional to evaluate the real estate market properly and anticipate all the rest during this declining market.

With the current challenges going in the real estate market that is impacting the economy, there are some considerations that the investors must keep in mind to assess an opinion of value.

Valuation methodology

Generally, you will find three primary methods that are recognized to value real estate. It includes the cost, sales, and income approach. The investor or the real estate typically relies on the income approach.

This is because it is based on the results, which states that the property’s value indication is found by using the anticipated benefits and changing the results into the property’s value.

Here the services expected include the current value of the property’s net income and the anticipated proceeds coming from the subsequent disposition of the property following a holding period.

Further, there are two income approach methods

  • Direct capitalization of the net income of the first year using the capitalization rate.
  • A discounted cash flow analysis is found through the investment’s net income over a subsequent holding period.

The methods are direct capitalization, which is simple and straightforward and is highly used when the property is in a stabilized state. In contrast, the discounted flow analysis requires an appraiser to consider all the assumptions applied year over year during the study of the holding period.

When the discounted cash flow method is used, the property’s current value is calculated using the discount rate, which is found by examining the investor or users’ requirements for similar investments.

Valuation assumptions

While making the valuation assumption, it is essential to incorporate sufficient market support. It includes using a good amount of cash flow and investment rate assumptions to avoid being overly conservative.

The cash flow generated by the real estate property comprises annual net cash flows during the ownership period or return on investment. It also includes the return on investments. All of which is taken at the end of the investment holding period.

Thus, it is essential to pay attention to the projected cash flow risk and find residential value in selecting the right investment rates. Further, it is vital to in the property’s historical data for its applicability.

Qualitative analysis

The operational reports and the valuation analysis of the property must include an accurate level of qualitative analysis and attendant explanations that justifies the research and enable the user to have a clear understanding of the appraiser’s thought process while developing the opinion of value.

This becomes especially important in the current challenging market when the views are varying, and the logic behind every decision or result must be made clear. Further, the market data and support used for the analysis must be relevant, timely, and comprehensive.

Condition of sale

While evaluating the comparable transactions of the market, it is vital to emphasize calculating the market condition and sales price along with the sales condition for better results.

In contrast to the market price, the market value must consider market exposure in a marketing time, open market, motivated seller, motivated buyer, and typical market financing. Remember, there is uncertainty during a crisis like the covid situation, meaning the property sale conditions will differ significantly based on certain factors. Thus, it is vital to have a clear set of distinctions between distress sales and the market.

Additional valuation scenario

In case of an economic crisis, the appraisers need to come up with alternative valuation scenarios. For instance, in case the property is used by a non-credit tenant or is entirely occupied by a single credit tenant, then it will be beneficial to value the building as unoccupied, which in simple terms is referred to as go dark scenario. Besides this, the other economic scenarios need to be warranted based on the requirement of the valuation user.

Cash flow matters

Based on the appraisal, the anticipated cash flow can significantly impact the deal analysis, just like a fair market value. Thus, the projected cash flow is evaluated to find essential metrics like the debt service coverage ratio, debt yield, etc.

The following cash flow metrics can significantly impact the deal structuring during the underwriting process, including holdbacks, covenants, earnouts, and cash flow sweeps. Thus, it is vital to pay good attention to the cash flow and the concluded value during the development process.

Rising through the difficulties of an unpredictable market

The Uniform Standards of Professional Appraisal Practice has defined the generally recognized ethical and performance standards for the operation profession in the United States.

An appraisal is a process or method of developing an opinion of value. Given that it is an opinion but not a science, the users of value opinion must seek well-reported and developed analyses according to the current stats.

Further, the valuation industry must provide the lenders, investors, and other users with a detailed report of the market and analytical support, sound judgment, and transparent and precise logic during uncertain times.

 Conducting property valuation during search critical time is more than challenging. However, it also presents an opportunity for the valuation experts to use their knowledge and skills to bring forward the best results.

Despite all this, the experts must consider the current market starts and use the relevant data to develop his opinion as this will guarantee the user gets the correct information.

Take professional help for better results.

The current pandemic situation has dramatically impacted the market condition. Thus, it is vital to take professional help for the real estate property valuation.

Private Capital Investors is a well-known company who can offer you quality services. They have the best professionals who can perform a detailed analysis of your property and bring forward the correct opinion.

Their professional assistance will help you decide the best for your property. So do not wait and contact the professionals to get adequate assistance with your commercial real estate property valuation.

Want to learn more? Get in touch with us today.

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