Real estate has never been harder to value

The biggest takeaway from a recent panel on valuation issues in distressed real estate markets was that even professional appraisers are hard-pressed to come up with a definitive market value for a property in this tough environment.

All the panelists, on stage yesterday at the PERE Real Estate CFOs Forum in New York, stressed the need to “look behind the numbers” as opposed to simply using a recent transaction price as an indication of value.

John Busi, executive managing director of the valuation services practice of Cushman & Wakefield, exhorted the audience to “dig in” until they have enough information. What were the motivations of the sellers? What were the motivations of the buyers?

The other panelists were Peter Brooks of Ernst & Young, Brian Glanville of Integra Realty Resources and Daniel Lesser of Richard Ellis.

For the asset that needs to be appraised, it’s important to consider a broader context. Both the “highest and best use” of the property and the replacement cost are factors. Tenant quality and whether or not the asset needs refinancing in the future should also be factored in to valuation work.

One thing that managers might be tempted to factor in, but should not, is the time horizon over which the owner plans to hold onto the asset, said the panelists. Just because a manager wants to sell the asset five years from now doesn’t mean the current fair value should reflect the expected sale price five years from now.

“Market value is the value at the date of appraisal,” stressed Glanville.

Lesser, a hotels expert, highlighted some of the unique difficulties of valuing hotel properties. He suggested thinking of hotels as properties whose “leases” are up every night, and “rents” are highly variable from day to day. This coupled with dramatic swings in demand and occupancy rates mean that net operating income and therefore values see “manic highs and lows in very short periods of time”.

But as tough as valuation might be in inactive markets, it might become even more chaotic when deals start to pick up again, the panelists noted, as values could vary widely at first.

Lesser, who tracks the sales of single assets over $10 million in the hotel real estate market, said he’s seen a “rash of transaction announcements” in recent weeks. He mentioned the sale of New Orleans’ Windsor Court Hotel for $44.2 million to a partnerships led by The Berger Co., investor Eric George and Dallas real estate firm Crow Holdings, as well as the sale of Andre Balazs’ Raleigh Hotel in South Beach for $30 million. The former was sold at 40 percent of replacement cost, and the latter at 75 percent of replacement cost.

When the market picks up, the capital sitting on the sidelines rushes in, and “the feeding frenzy begins”, those transactions should be considered as reflective of the market, Glanville said. Valuation in the upturn could be even more volatile than valuation in the downturn.