Why are many sellers of assets in denial about today’s lower valuations? The Moodys/REAL Index, which is based on actual sales transactions valued at $2.5 million and above, fell over 40% and continues to bounce along the bottom. Unless you are buying trophies in select cities such as New York and San Francisco, fair valuations for most assets are dramatically below those established at the market peak.

One valuation challenge for sellers is that they often expect to receive lofty valuations on the potential rent resulting from vacant space leasing and tenant renewals. During these troubled economic times, most buyers are extremely cautious when valuing such cash flows. Vacant space may provide little incremental value to the purchase price on a risk adjusted basis. Lease renewals might only happen at lower rents, if at all.

Furthermore, many real estate sellers may not understand the disproportionate impact of declining revenues on asset valuations. Due to commercial real estate having a largely fixed expense structure, a decline in income by 30% can impact value by 45%.