Changes In Appraisal Services Highlights Changes In Deal Flow

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October 2023

The pandemic coupled with low interest rates resulted in a boom within the appraisal industry. The request for services and activity were in high demand from lenders, investors, and owners for all types of commercial real estate and throughout the country.

After this break-neck speed throughout 2021, 2022 began on a high note as well. However as the Fed began increasing interest rates during the year, lenders began to tighten and reduce their commercial loan activity and some investors became stalled with their plans. Consequently appraisal demand dropped in concert with these changes in market conditions.

A recent report from Lightbox notes that in 2022 the volume of appraisal RFPs awarded was 21% below the 2021 number. The Lightbox analysis continues to say that the top sectors experiencing the decline included office, which is no surprise given the significant shift in how many people work. The other two sectors rounding out the top three in declines were healthcare and multifamily, while senior housing was the only category to experience an increase.

Taking a further look at the Lightbox study, the company tracks 375 counties in the United States. The report speaks to the fact that only 45 counties showed increases in appraisal project volumes year over year. The top five cities with reduced volume were Los Angeles, San Diego, Miami-Dade, Orange County, and Harris, Texas.

While on the surface this seems to put the appraisal industry in an environment where work is being chased and competition is fierce, these market conditions point to other areas of opportunity. During times of slow movement, owners and lenders are looking more carefully at their assets, identifying the underperforming players and making strategic plans. Appraisers play a large role at this time providing the due diligence necessary in changing and new market conditions. We experience an increased demand for appraisals, and very detailed ones at that.

In addition nearly $1.1 trillion worth of commercial mortgage loans are expected to mature before the end of 2024, according to Goldman Sachs Global Investment Research. As these tend to be balloon loans, borrowers will need to refinance at what is anticipated to be higher interest rates than the maturing loan. Appraisals for these commercial property assets will be needed to deal with these scenarios, and we anticipate these studies to escalate in the coming months.

The office to residential conversion movement is another factor playing into the anticipated hike in appraisal activity. In order to make important decisions, investors need to understand and know the current valuation of a property as well as the income producing potential following a conversion. Feasibility analysis, market studies, and market rental rate studies are just some of the services we provide that contribute to this due diligence.

Commercial real estate is a resilient industry, where current challenges also often present opportunities. The diversity of the industry is a lead actor in this scenario, with supporting roles played by location and timing. The future months will most likely mean further adjustment and acceptance of new rates, the continuation of current of low levels in transaction volume, and a resetting of property valuations across all sectors.

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