"From the peak in 2007 to its sale in 2009, the Bertelsmann building has decreased 63% in value—and that's for a trophy New York City office building," says Jeffrey Rogers, president and COO of New York City-based Integra Realty Resources, which appraised the asset.

As property fundamentals continue to wither, owners can either sell their depreciated assets or hold onto them until the market recovers. But with so few sales to weigh against, those leaning toward a trade are having a hard time pricing their properties. Even valuation professionals are finding the constraints of the market challenging. Nevertheless, they are devising creative solutions to appraise asset values.

Hard Fall
Across the board commercial property values have nosedived 43.7% from peak 2007 levels, according to Moody's/REAL Commercial Property Price Index. The ratings agency anticipates cash flows on assets with short-term lease structures, such as hotels and multifamily, will bottom out this year or early 2011, while office, retail and industrial will take longer. Moody's forecasts prices to fall by as much as 55% in coming months.

Then, says Moody's managing director, Nick Levidy, "Valuations will rebound off the bottom and settle in for the longer term at levels 30% to 40% below the market peak as liquidity and investors return to the sector and property cash flows begin to recover." But that recovery of cash flows, he adds, may take several years.

By property type, multifamily investors resold the most assets in the past three months, with many averaging losses of more than 30%, according to RCA. Office investors, who were also actively reselling, saw returns range from a 45% gain to more than 60% loss. RCA attributes the disparity not only to the uncertain pricing environment, but also to a growing schism between core-stabilized and value-add properties. And while retail investors flipped their assets at discounts ranging from 2% to 25%, industrial and hotel investors largely let their assets go at double-digit losses.

On the upside, however, some owners witnessed marginal gains on their investments in the last quarter. DRA Advisors netted a $12.8-million profit last November through the sale of Ravina Center, an 804,876-square-foot office building in Atlanta. And with the sale of its 834-unit Chelsea Ridge apartments in Wappingers Falls, NY AIMCO realized a $31.5 million return on investment.

Reworking the Model
Uncertainty in the market has certainly made valuations challenging. Owners looking to sell or merely assess the worth of their assets must do so in a market lacking much of the required data metrics. A dearth of comparable sales activity in the past two years, in particular, has made it difficult to find benchmarks to estimate market value accurately.

Appraisers traditionally employ three methods of valuation: the sales comparison approach, the cost approach and the income approach, explains Peter S. Brooks, executive director of Ernst & Young's transaction advisory services in New York City. The cost approach emphasizes the price of replacement, while the income approach involves the initial capitalization rate derived from an asset's cash flow.

In the absence of trade figures, Brooks stresses the significance of cash-flow analysis. This mark-to-model approach, as it has been popularly branded, differs from mark to market, in which market prices are used to calculate values, losses or gains.

"You can construct an income model relying on some sort of external evidence and use that as the primary basis of valuation," he explains. "The model should be a good faith attempt to do what a typical market participant would do when estimating the income, expenses, discount rates and cap rates."

To devise a substantive value model, Leslie P. Sellers, president-elect of the Appraisal Institute, encourages appraisers to look at property listings. "Listings are telling us what's current in the market, what's competitive and what buyers and sellers are thinking," he says. "We can adjust past sales for market conditions and continue to use them. But the most current data is what informs us in a changing market."

Sellers says besides reviewing existing listings, it's important to look at the offers on those listings as well as failed contracts. In doing so, he stresses that appraisers must verify the data by interviewing the buyer and seller to ascertain their motivations, the pricing process and transaction terms.

"The sale price is not always the true sale price," Sellers says, noting that an asset's ultimate cost is derived from many factors. Appraisers, he says, must ask if the seller offered incentives, such as below-market financing, which could raise the final price.

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