Following the disruption of the pandemic and subsequent low mortgage interest rates, appraisers experienced an unprecedented increase in business and demand for services from transactions and refinances, according to Valcre co-founder and CEO Lucas Rotter.
“With the recession looming, we anticipate demand for transactional valuation and appraisal services to slow moderately and temporarily before a full-blown recession occurs,” Rotter told Valuation Review. “Inflation is driving operational costs up, and businesses are working to predict how things will look over the next year. In conjunction, the recent spike of interest rates is increasing the cost and reducing access to capital. Appraisers are accustomed to looking back and evaluating building performance during past cycles when assigning value to properties.
“This particular downturn is unique, and appraisers are staring into an unpredictable future. Appraisers are going to have to carefully analyze the impact of interest rates and other macroeconomic factors on property values,” he added.
As to how the commercial side of appraising will remain “recession resilient” in the coming year, the Valcre executive noted that appraisal and valuation professionals serve a vital role within the commercial real estate industry. Valuers, he told us, have overcome the highs and lows of many past business cycles, and are well equipped to adapt their services to fit the needs of their clients during market volatility.
“Demand for transaction-related services is trending down, deal volumes are slowing and investors, as well as lenders, are pausing their activity. Savvy appraisers will adapt to the changing environment by diversifying their services to generate revenue,” Rotter pointed out.
“As technology advances, clients expect quicker turnarounds, cleaner presentations, and higher caliber reports,” he said. “Having a sophisticated tool to manage workflows, streamline research and produce professional reports will be key. Valcre has seen a substantial increase in new users onboarding our platform for this very reason.”
Rotter also gave specifics with regards to how lender-driven appraisal volume for refis and sales transactions will slow amid the downturn.
“Appraisers can be somewhat vulnerable to business disruption during economic downturns. Transaction-related appraisal services account for approximately 25 percent of appraisal volume, while refinance-related appraisal services account for 20 percent of appraisal volume,” he said. “During the last downturn in 2008, we learned a lot about trying to stay ahead of forecasts, being prepared, and diversifying. This year, appraisers will have to be quick-moving and flexible, as the majority of demand will likely shift from transaction-related appraisals to financial reporting, loan monitoring, estate planning, and eminent domain. Being the best appraiser for your client will be of the utmost importance in the current climate. Those who fall behind on adopting technology will fail to diversify their book of business and have trouble forecasting operational needs for the future.”
We also questioned if there will be a demand for key appraisal services, despite investor inactivity. Rotter said although commercial real estate activity as a whole is on the decline, the current housing shortage and need for rental housing will keep multifamily deals underway, albeit at a slower pace than years past.
Activity in the industrial and self-storage sectors, he added, will likely remain strong as well. The future of retail will continue to be disrupted by e-commerce and remains uncertain during economic turbulence. As for office, that sector will continue to strain due to shifting work-from-home preferences, and occupier absorption remains below pre-pandemic levels.
How will the actions of banks affect commercial real estate moving into 2023?
“Banks greatly impact commercial real estate demand, the cost of financing, and the availability of credit, which in turn can affect the overall performance of the market and demand for appraisal services in 2023,” Rotter said. “Banks play a key role in financing commercial real estate transactions, and changes in their lending policies can affect the availability of credit and impact the market. Banks also influence interest rates, which can impact the cost of borrowing for commercial real estate and the demand for properties. When it comes to the economy, banks monitor economic indicators and adjust their actions accordingly.”
“If they anticipate a downturn in the economy, banks may tighten lending standards or reduce lending, which can have a significant impact on the commercial real estate market,” he went on to say. “Additionally, many banks invest in Real Estate Investment Trusts (REITs), which own and operate commercial real estate properties. Changes in the performance of REITs can affect banks’ investment portfolios and impact the overall market as well.”
Rotter also addressed how he sees the “tide turning” for appraisers once the economy enters a full-blown recession and noted banks and lenders are paying more attention to assets that are underperforming. As such, he anticipates appraisers will see an uptick in demand for loan monitoring services in the foreseeable future.
Typically, during a recession, lenders require more rigorous and detailed appraisals to assess the risk of loan defaults, he added.
“This could increase the demand for commercial real estate appraisers, as more properties are appraised to determine their value in a changing market,” Rotter told us. “These detailed reports require more support and evidence for the assumptions and conclusions. Utilizing a technology tool like Valcre that pulls in additional data sources helps appraisers meet client demands quickly and efficiently.
“In a recession, the type of properties and transactions requiring appraisal may change, leading to a shift in the focus of commercial real estate appraisers,” he added. “For example, appraisers may be more focused on distressed properties or special purpose properties that are more vulnerable to market fluctuations. Appraisers will need to keep their eyes on these trends and evaluate ways to adapt their business as needed to better provide the services most in demand.”
Whether or not there may be signs of increases resulting from demands concerning loan monitoring, stress testing, loan reserves, loan servicing, etc., Rotter told us that during times of economic turmoil, lenders and loan servicers may require more frequent and comprehensive appraisals to assess the risk of loan defaults and to ensure that they are holding adequate loan reserves. This could lead to an increase in the number of commercial real estate appraisals conducted, particularly for properties that may be more vulnerable to market fluctuations.
“Additional steps such as stress testing and loan monitoring may require appraisals that consider different scenarios, such as declining rent levels, increased vacancy rates, and other factors that could impact the value of a property and the risk of loan default,” he said. “These appraisals can provide valuable information and insights that lenders and loan servicers can use to make informed decisions and manage their portfolios effectively.”
We also asked the Valcre executive what other factors will be prevalent in 2023, to help the appraisal profession move forward and stay relevant.
“The biggest factor will be technological advancements,” Rotter said. “The use of technology in the appraisal process, such as natural language generation, big data analytics, and other digital tools, will continue to evolve and change the way appraisals are conducted. This could lead to increased efficiency and accuracy.”
Other noteworthy factors Rotter included were market changes, government regulations, professional development and competition.
He said the commercial real estate market is constantly evolving, and changes in the market can impact the demand for appraisal services. For example, shifts in economic conditions, changes in property types, and shifts in market demographics can all affect the demand for appraisals.
“Government regulations play a significant role in the appraisal profession, and changes to regulations can impact the practice of appraisal,” Rotter said. “For example, changes to appraisal standards, licensing requirements, and disclosure laws can all affect the profession. The appraisal profession is constantly evolving, and appraisers must stay informed and up to date with the latest industry trends and best practices to remain relevant. This may involve continuing education, staying informed about changes in technology and market trends, and adapting to new techniques and methods.”
“Competition from other real estate professionals, such as brokers, agents, and consultants, can also impact the relevance of the appraisal profession,” he added. “Appraisers must differentiate themselves and highlight the value they bring to the table, such as their expertise, independence, and objectivity. By staying informed and adapting to these factors, commercial real estate appraisers can remain relevant and continue to provide valuable insights and services to their clients.”
Finally, Rotter emphasized that commercial appraisers “will remain busy through the next 12 months.”