How are appraisals holding up versus actual transaction prices?
It's a broad question but it seems like appraisals I've seen recently are coming in higher than what the actual market value would be. Good for financing but possibly not realistic. What are you all seeing in your markets?
[{"id": "iwjd3cl", "text": "This scenario is giving me tough time closing deals, especially in Retail", "replies": [], "depth": 1}, {"id": "iwjetri", "text": "Several large firms are currently suing their appraisers for fraud because their values aren\u2019t reflecting current market conditions.", "replies": [{"id": "iwjmryn", "text": "Is there a link to this story?  I haven't heard anything about this.", "replies": [{"id": "iwk1qi1", "text": "https://outofmyass.com/", "replies": [], "depth": 3}], "depth": 2}, {"id": "iwjrceg", "text": "When you say large firms do you mean banks? Also any links to these claims?", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwjh2z4", "text": "Office appraisals are almost comical at this point.", "replies": [{"id": "iwjz2cr", "text": "Always comical. Price should reflect market, not bank interest.", "replies": [{"id": "iwkw6ho", "text": "But a driving factor of the market is determined generally by liquidity, and liquidity is materially impacted by interest rates.  \n\nIn addition, your cap rate will always take into account the cost of capital, so as it goes up, for investors the price must come down to account for this increase in risk.", "replies": [], "depth": 3}], "depth": 2}, {"id": "iwka0bf", "text": "I own and have equity in some class A office that is well located in major cities.  Our portfolio is between 80% and 90% leased across the board with no real concessions. We aren\u2019t raising rent but we aren\u2019t giving many concessions so our long-term overall valuation or need to sell is greatly exaggerated if you were to read any trade publications or main stream press about the office market. I will admit that are short term cap rates and ability to refinance are absolutely effected by current market conditions. \n\nI am long on office, it\u2019s just going to be a tough couple of years. We are actively leasing right now its just slow, office especially well located class a office isn\u2019t going anywhere, it will need to adapt how people use it though.", "replies": [{"id": "iwm1ii1", "text": "depends what you own. i don\u2019t think overall demand is going to return to 2019 levels but some segments and geographies will be alright", "replies": [{"id": "iwm4p37", "text": "For sure we are in top national MSA markets but supply and demand will have a definite effect as more supply is converted or redeveloped so best in class assets are in for a good time over the long run unless too much supply and pipeline creates a glut.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwji48s", "text": "Are transactions happening at deep discounts yet? I\u2019ve certainly seen volume decline but not necessarily giant discounts. In a few instances, sure, and I think there will be discounts but I\u2019m not sure a trend has been established yet to say all appraisals should absolutely be much lower. (I\u2019m in NYC)", "replies": [{"id": "iwjp91f", "text": "Not yet. People have jobs and businesses haven't gone bankrupt yet that would force a reduction in rent payment and increase distressed sales.\n\nI suspect at some point the office leases will expire on half empty buildings, but businesses are pushing to get lots of people back to work so it is unclear if office demand will fully recover.", "replies": [], "depth": 2}, {"id": "iwjz93v", "text": "I agree. Wtbs, I have a property under contract for $509k and it just appraised above $600k, so yeah.", "replies": [], "depth": 2}, {"id": "iwklf74", "text": "SF will be getting dicey soon.  Vacancy rates are getting to be a problem here.", "replies": [{"id": "iwl1fqs", "text": "SF is doomed. My jaw drops every time I look at their office market numbers on CoStar.", "replies": [{"id": "iwlyrir", "text": "Wait till you see how bad the diligence has been by the banks financing deals over the last 3-4 years.", "replies": [], "depth": 4}, {"id": "iwm9xdh", "text": "which are UNDER reported and don't take into account most sublease space. \n\nSF is north of 30%", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwju8cy", "text": "I remember 2010-2012 when there were a lot of REO properties and those sold at steep discounts.  Perhaps people who bought in the last 5 years with 5 year loans coming up might be negative cash-flowing when they refi at current interest rates and may have to sell because they can't refi...I haven't seen this yet , has anyone else?\n\nTo answer your first question just sold a $1.5m retail owner-user property and the appraisal came in at exactly the purchase price.", "replies": [{"id": "iwljb1s", "text": "The latter may just be a reflection of the appraiser using your sale as the ultimate indication of value.  \"Of course the price is the best reflection of the assets market value. It's in the market!\" I'm always a little wary of appraisals that come in on the nose.", "replies": [{"id": "iwmi0y6", "text": "It is the best indication. If my comparables and approaches support the contract price, then it\u2019s ludicrous to conclude at anything else. There\u2019s no other better data to be had.", "replies": [{"id": "iwmjfr9", "text": "True. Kind of weird how that always seems to happen. But banks do a lot of underwriting themselves as well, and ultimately their business is doing loans and collecting interest and fees", "replies": [], "depth": 4}], "depth": 3}, {"id": "iwmqhxt", "text": "As long as the asset was openly marketed, willing seller, willing buyer, no other factors like creative financing, buyer owns the property next door and is motivated to buy, private equity fund with a clock on their funds, etc., you should be wary of appraisals that don't come in at the sales price. It's literally the definition of market value. If I'm working on a property that's under contract and it meets the criteria of market value, I'd have to have a lot of support to come in anywhere other than sales price.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwjw3ny", "text": "I'm not sure the 'good for financing' piece really applies anymore.  Any bank worth their salt has stepped up their equity requirements, pricing, and underwritten rates which have basically made LTV a non-factor in financing.  Most are constrained by DSC at this point.  \n\nAs it pertains to the question posted about 'deep discounts', those haven't hit yet but that train is coming.  On the construction side, we're seeing a lot of fire drills surrounding interest reserve sufficiency.  \n\nFor stabilized assets, we're seeing some massive refinance risk over the next 12-24 months as properties that were previously financed with an interest rate hedge on a mid-term basis (call it 3-7 years) are seeing current rates, even from LifeCo/CMBS/etc, that are basically double (sometimes more than 2x) the fixed rate they're currently paying at.  This in turn could lead to a pretty hefty liquidity crunch from borrowers and potential a noticeable increase of foreclosures and developers handing keys back to the banks.  \n\nOffice properties are very clearly the most vulnerable at this point as WFH has become permanent for a lot of positions and as companies have started layoffs.", "replies": [{"id": "iwjwj5m", "text": "Very insightful. A double whammy is likely setting up when it\u2019s time to refi and vacancy is on the rise as a recession or low growth plays out.", "replies": [{"id": "iwjxge3", "text": "It's certainly possible.  Office is going to be hurting, but it'll be interesting to see how this pans out if increased layoffs lead to a power shift from employees to employers and if that results in companies requiring people back in offices once more.", "replies": [{"id": "iwmpof5", "text": "Why do you think power shifting back to employers would lead to them requiring more people back in the office? \n\nMany companies like WFH just as much as the employees because it is cheaper for them.  Now there are some companies where WFH just doesn't work, but that's not every company.", "replies": [{"id": "iwmrqww", "text": "This is true, it is in many cases unnecessary for certain employees to return downtown.  However, there's been a concerted push by a lot of companies to get people back downtown.  There's been limited success to date with this effort as companies haven't been able to 'force' this because of the state of the job market.  \n\nProductivity being down post-pandemic is a big factor companies are using to bring people back.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "iwl1x0r", "text": "I don't t get it why ltv is not relevant. With new refinancing rates ltv ratios have become very dynamic. In our meetings we always mention that in detail. Could you elaborate a bit?", "replies": [{"id": "iwllj0d", "text": "Good question - loan proceeds are typically constrained by two pieces (three if you're doing a construction loan), which include DSC and LTV.  Most lenders view the market as heading into a recession and have become more guarded in their lending practices, choosing to cap LTV at lower levels, use higher sensitized or underwritten interest rates to calculate DSC, and also potentially requiring higher minimum DSCR.  \n\nUnless you have an appraiser that's been more conservative,  valuations have seen minimal downward adjustment to date.  Partly due to rising rental rates (product type dependent) but also due to cap rates remaining fairly static.\n\nGoing back to what determines loan proceeds, if interest rates (either actual or sensitized/underwritten) continue to rise, that's going to drive debt payments higher.  Combine that with lenders requiring higher minimum DSCR and potentially looking for developers to hold/contribute more equity in their projects, that's going to cap loan proceeds much sooner than a maximum LTV requirement.  \n\nThere are of course exceptions to this, but by and large rising interest rates and tighter lending limits will hamper loan proceeds much earlier than LTV would.  This may change as cap rates adjust to current market conditions.", "replies": [{"id": "iwp1qmk", "text": "Thanks a lot for the detailed explanation. I need to reconsider our external communications with this new perspective.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iwk19qp", "text": "Our CRE appraisal firm is talking with brokers,  investment groups, and developers on a daily basis. There is limited empirical sale data reflective of the current market so we are placing greater emphasis on anecdotal info from market participants. Cap rates and discount rates have clearly increased in 4Q, to what extent varies on market, property type, leasing status, and who you ask (there\u2019s a pricing disconnect between buyers and sellers hence the lower sale volume).", "replies": [], "depth": 1}, {"id": "iwm4vtr", "text": "Source: working in the appraisal industry. \n\nBig time adjustments for appraisals. We are catching up on cap rates and sales to transition to the new market, but it takes time. I think most market don\u2019t have the data to accurately represent what is going on in the market.", "replies": [{"id": "iwm9txo", "text": "As someone in a buyside transaction role, we don\u2019t even have the forward looking data to understand the market right now.  Comps are all over the place and the bid/ask spread has never been wider in my career.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwmxkwz", "text": "Wall Street journal ran a story a couple weeks ago apartment evaluations are down 15%", "replies": [{"id": "iwnz6wf", "text": "Not surprising. MF was getting really hot.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iwn3504", "text": "In hospitality and have had a couple bad appraisals recently- lower than purchase price.", "replies": [], "depth": 1}]