Near-Term Appraisal Demand Likely To Remain Muted

As further interest rate hikes loom, appraisal demand is likely to remain tepid as lenders recalibrate, according to a new analysis from LightBox.

After a record-breaking 2021, appraisal volume remained high as 2022 began — but by midyear, the Fed’s series of incremental rate hikes had shut some borrowers out of the market and some lenders began to pull back on commercial property lending. Overall, lenders’ awarded appraisal fees peaked in the first quarter of 2022 but ended the year with the second-lowest quarterly volume in three years. And RFPs for appraisal projects “notably declined” after Q1, with awards in the fourth quarter reflecting the lowest quarterly volume of the year.

“As opportunities for appraisal projects began to decline, the response rate noticeably increased to its highest levels in two years,” the report notes. “This trend reflects firms chasing a smaller universe of opportunities as competition for appraisal projects intensified.”

The report also notes that overall, the total volume of RFPs awarded in 2022 was 21% below 2021 when rates were much lower and bid-ask spreads between buyers and sellers weren’t as pronounced, positing that “this shift in market conditions led to a general slowdown in financing and a related drop in appraisal demand.” The result? Quarterly appraisal award volumes slumped 45% from the first to fourth quarters of last year. Healthcare, multifamily and office claimed the largest declines in volume. Senior housing was the only property type to post an increase, suggesting rising interest rates haven’t yet hit the sector, LightBox analysts say.

From a geographic standpoint, just 45 counties of the 375 with statistically significant data LightBox tracks posted gains in appraisal project volumes year over year. Conversely 327 counties lost, on average, more than 22% of their appraisal project volumes, translating to 21,000 fewer compared to 2021. The cities with the biggest declines in appraisal project volumes were Los Angeles, San Diego, Miami-Dade, Orange County, and Harris, Tex.

This year, demand for industrial and multifamily is likely to dominate activity, albeit at a lesser rate than in years past.

“Appraisals will be an important area of commercial real estate as lenders, buyers and sellers await more clarity on price discovery in response to the higher rate environment,” the report predict. “Investment and lending in today’s uncertain climate will require a focus on the underlying fundamentals that have served the industry so effectively over the course of the protracted recovery since the Great Financial Crisis.”