Appraisers Are Struggling to Assign Value to Office Properties

Commercial real estate appraisers are finding challenges assigning value to office properties due to massive uncertainty in the sector. According to Lucas Rotter, founder and CEO, of Valcre, “The pandemic has created additional complexities for commercial appraisers assigning value to office assets as uncertainty exists in the market.” Destabilized occupancy and uncertainty around future office demand are at the heart of the challenges.

“Occupancy has yet to rebound to pre-pandemic levels, and renewed concerns about the Omicron variant are making remote work options increasingly attractive. As lease contracts expire in the coming years and renewals are up, it remains unclear what tenants’ next move will be in regards to their office needs,” Rotter tells GlobeSt.com. “Appraisers valuing office assets will have to account for these unknown factors and keep market-specific volatility top-of-mind.”

Most appraisers evaluate multi-tenant office assets based on the assumption of a 10-year hold to give an accurate value. “This 10-year holding period accounts for volatility in the market or high tenant turnover that could occur in future years,” says Rotter. “The net operating income of the 10-cash-flow-years is discounted back to present to conclude the value of the asset.”

So, the uncertainty of future office usage has disrupted standard assumptions about the asset; however, Rotter says the process to review lease and occupancy data has not changed. “We have noted that in many markets concessions are up,” he says. “In order to maintain face rents and attract new tenants, landlords are providing more free rent and greater tenant improvements than pre-pandemic. Extended free or reduced rental periods have been seen in order to persuade tenants to sign new leases.” He added that inflationary pressures will likely help buoy office rents.

The future of these challenges hangs in the answer to CRE’s new favorite question: Will employees return to the office? Rotter says that as long as the pandemic impacts office usage, assigning an office value will be a challenge. “I can say that as long as the effects of the pandemic persist and office demand remains in a state of flux, the future recovery of the sector will remain somewhat of a mystery,” he says. “As the dust begins to settle and companies look to return to the office in full force, we will then be able to assess how exactly their office needs have changed, and how that will impact future values.”