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Commercial Corner

Diversifying skills to include commercial analyses

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Commercial Corner
Wednesday, April 26, 2023
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Residential appraisers can diversify their skills to include commercial valuation by enrolling in qualifying courses, working alongside mentors, and practicing on smaller properties that will help broaden their experience, according to Valcre co-founder and President of Client Experience Grant Norling.  

“Although becoming a licensed commercial appraiser involves further training, residential appraisers have a great head start, having already taken qualifying coursework, and they possess real world experience of applying valuation techniques on the residential side that are transferable to commercial valuation,” Norling told Valuation Review. “Residential appraisers that want to expand into commercial valuation need to factor in the associated time, cost, learning curve to understand new concepts, market knowledge, and licensing requirements.

“Based on feedback the Valcre team has received from residential appraisers trying to expand into commercial valuation, the most difficult challenge in this process is obtaining a supervisory mentor for the experience requirements that might necessitate significant research and networking to find the right fit. Facilitating a more efficient matching process between trainees and supervisors is something the appraisal industry needs to do better at moving forward,” he added.

Norling also touched on some of the more pronounced reasons as to why there is a demand for commercial appraisers. It’s an “aging industry” that has experienced difficulty keeping pace with demand for an array of services including financing, tax appeals, insurance, litigation and eminent domain, he said.

“The lending sector for sale transactions, construction and refinances is particularly time sensitive, and our industry struggled to meet the mark in terms of maintaining desired turn times and velocity during the most recent economic expansion,” Norling said. “Lending work has really dried up in recent months with sharply elevated interest rates which can be seen as a temporary lull to this sector of the appraisal industry. 

“Now that the CRE market is experiencing recessionary conditions along with sharply elevated interest rates, there will be a lot of scrutiny on the valuation of bank loan portfolios,” he said. “This is attributable to the shorter-term nature of CRE loans that typically range from three to 10 years, compared to residential loans that are typically fully amortized over 30 years.”

Additionally, Norling said tax appeal activity is very brisk right now and is anticipated to remain elevated for the next 18 to 24 months, according to industry experts.

“Finally, the impact of the 2021-2022 Infrastructure Investment and Jobs Act cannot be understated either, which is driving appraisal velocity for right-of-way and eminent domain appraisal assignments,” Norling stated.

 We also wanted to know how this area of appraising (commercial) is less susceptible to appraisal waivers or exceptions.

“Commercial appraisals are less susceptible to appraisal waivers than residential appraisals due to their greater complexity, lack of reporting standardization, often higher value, and regulatory requirements,” Norling said. “Commercial properties are more diverse, making it more challenging to compare them, requiring in-depth analysis to determine their supportable value. Commercial properties are generally more expensive than residential properties, leading to more significant financial gain or loss, making it unlikely to waive the appraisal.

“The failure of iBuyer companies to yield credible valuation results on the single-family residential side is revealing as to why appraisal professionals are incredibly valuable in the marketplace. The complexities involved on the CRE side further bolster valuation services from certified valuation experts,” he added. 

 As to how critical it will be for the commercial appraiser to adapt and embrace the many technologies out there to make that side of the business more successful, Norling suggested commercial appraisers “must embrace” new technologies to remain competitive in the industry. Adopting digital platforms and tools can streamline workflows and automate tasks, improving efficiency.

Technology also can enhance the accuracy of appraisals by providing better data access and advanced analytical tools, he noted.

“Clients increasingly expect appraisers to use technology for faster and more comprehensive appraisals, differentiating themselves in a competitive market,” Norling said. “Knowledgeable and adept commercial appraisers that take advantage of emerging technologies will be better positioned to thrive in this changing landscape. Adapting and embracing new technologies is critical for commercial appraisers to remain successful.”

The company co-founder also spoke about the greater complexity of commercial-related assignments and what residential appraisers need to be aware of when considering expanding into commercial valuation.

First, residential and commercial appraisers differ in the types of properties they appraise, methods used, complexity, and fees.

“Residential appraisers focus on single-family homes, individual condos, and townhouses, while commercial appraisers appraise various commercial properties such as hotels, offices, retail centers and warehouses,” he said. “Residential appraisers primarily use the sales comparison approach, while commercial appraisers may use a variety of approaches, including the income approach (direct capitalization & discounted cash flow analysis) and the cost approach. Commercial properties are generally more complex and require more expertise and experience to appraise.

“Commercial appraisals command higher fees due to the higher stakes involved, complexity of the properties, and additional expertise required,” Norling added. “In general, residential appraisal fees are less than $500 and rarely exceed $1,000; whereas commercial appraisals on average are about $3,000, and depending on location, scope and complexity can be greater than $10,000.”

This being a down time for residential appraisers, is this the time for commercial appraisers to enter the field?

“While residential appraisers may be able to expand into commercial appraising, it's not necessarily a straightforward transition. They will need to develop new skills, familiarize themselves with the commercial real estate market, meet licensing and certification requirements, and compete with established commercial appraisers,” Norling told us. “The timing of the market may provide some opportunities, but it’s not the only factor to consider when deciding whether to expand into commercial appraising. The requirements for expanding from residential to commercial licensure is prolonged - there is no instant gratification; rather it needs to be approached as a long-term investment for business stratification.”

 But again, the “age factor” remains a key factor, commercially speaking.

The appraisal industry is increasingly becoming a world of older men and women, as some studies from the Appraisal Institute peg the average age of the practitioner at over 60, Norling indicated.

“In a certain sense this is good for appraisers in the short term, as more professionals retire, there should plenty of appraisal work to go around, but it ultimately is not sustainable,” he said. “If the industry does not increase its lackluster attraction to Generation Z or even millennials, the shortage of entry-level professionals will place increased pressure on a thinning workforce, especially as Baby Boomers continue to retire.”

To conclude our conversation, we asked Norling about other options to tackle the barriers into the profession. Specifically, does there need to be an increase as far as college programs specific to the commercial real estate appraisal profession?

“Much like the larger commercial real estate industry, the appraisal industry is fragmented, as many small companies make up the field. While these barriers exist, they can be removed,” he added. “A concerted industry-wide effort to make changes to the traditional apprentice model is necessary to recruit more young professionals into the fold. This can be reached in part by increasing starting wages, streamlining the training process, and infusing a technology-driven approach to business. This effort is essential to ensure critical knowledge is transferred to the next generation, and market demand is met.”

 

 

 

 

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