commercialgradeheader

Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

Remember the Ouija Board you played with as a kid? It used to be so comforting to know that you could tell the future. With the local real estate market in transition, and everyone trying to understand just what the heck is going on, it may be time to break out the Ouija board again.

Our market, New York City, seems to be somewhat insulated from the woes being experienced by the rest of the country, but experts throughout the City (and the Country) seem to disagree on whether our market fundamentals are just so different from the rest of the country that we will escape the pain, or if it’s just been delayed and around the corner.

Lenders in particular seem to be scratching their heads. Over the past six months or so I’ve received a flurry of phone calls from a number of major lenders interested in retaining us for a market study so that they could, essentially, figure out if it’s safe to continue making loans in the near future.

The conversation usually goes something like this:

Lender: We’d like you to do a market study for us. What would you charge?

Me: Let’s talk about the scope of the study. What questions, specifically, do you want us to address?

Lender: We’d like to know if there’s still demand for new development and what the saturation point is. We’d like to know every project that has come on line and is in marketing, what it’s selling for, and the absorption rates. In addition to what’s currently marketing, we’d like to know every project in the pipeline. We’d like to have that broken out by condo, co-op, rental and by neighborhood.

Me: I see. You realize that there is no central database of such info. It would require all original research with the various community districts, Buildings Department, Attorney General’s office and lots of calls to brokers and developers. This is a large and very complex market and at the end of the day, I’m not sure that this data or any data is really going to answer the demand question for you. We can do the research but it’ll be very expensive and take a couple of months. (I know, I’m quite the salesman!)

Lender: (long pause) OhI have approval for $5,000.

Me: (long pause) Wellmaybe we can revise the scope somewhat

I understand wanting to get your arms around the situation, but the bottom line is that no market study or econometric analysis is going to tell a lender that it’s safe to continue building and making construction loans in this environment. I’ve seen analysts put together pages of formulae and algorithmic theorems trying to quantify demand, but there are so many variables and assumptions incorporated into these models so as to render them (in my opinion) meaningless.

Try as we might to understand the current market, it’s still anyone’s best guess as to where we are in the cycle and how much pain we’ll experience before it’s over. No examination of past performance or theoretical demand projections are going to definitively answer that for us. Back to my original question.

Anyone have a Ouija board that I can borrow?


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4 Responses to “[Commercial Grade] Time To Break Out The Ouija Board”

  1. marty tessler says:

    John-been there, heard it many times. The guys making this type of call are CLUELESS as to what they’re doing as they’ve been given a clerk’s job. What I’ve done in the past when I used to get those calls is to say:”I hope I’m not insulting you but could you give me the number of the chief credit officer so that I can discuss your needs and the appropriate fee -it may be less than the amount you have budgeted but if you are looking for the universe of supply & demand, current absorption and what’s coming along in the pipleline your $___ fee will not come close to cutting the mustard.” Usually there was a silence but the real benefit was that you knew you did not want to deal with this person as a client.

  2. Edd Gillespie says:

    What John reports and what Marty and he share in terms of perspective strikes me as fallout from the schizophrenic foundations of the appraisal profession.

    As it stands appraiser after appraiser is licensed and turned loose on the public without sufficient training by any reasonable measure to solve the client’s appraisal problems. The idea persists that real estate sales experience is the preferred training for real estate appraisers. Witness how incredibly screwed up this profession currently is as a measure of the success of that preference. At the same time the primary objective of the profession, if USPAP is to be followed, is to enhance the public trust in what we do.

    I am persuaded that without market analysis, which is at least nine out of ten parts economics, appraisal reports of any kind are worthless.

    Clients have been trained by the profession that they can turn to appraisers for a cheap and fast certified market analysis that would cost tens of thousands of dollars if an economist or other qualified professional completed it. Indeed, at times clients even resort to a BPO or a CMA to save even more more nickles and dimes.

    While the re-emphasis on the scope of work recognizes that one size does not fit all, the profession must recognize, as John & Marty do, that turn time and fee required by the client definitely impact the scope.

    It seems to me that the profession’s regulators, who are supposed to be applying the USPAP standards in their environment, are inflexible in requiring perfection in appraisal service. No wonder the client’s grow to expect the best for not much dough. Client’s are also very aware that their disrespectfully low bids will successfully attract appraisers to a feeding frenzy and the profession will pretend the appraisers know how to analyze the market, because after all, the competency rule and the appraiser’s certification says so.

    When will we learn to require mandatory economic analysis training, which, in my opinion requires a minimum of a four year degree for even the most mundane appraisal, in order to enter this profession?

    For now I’d settle for an acknowledgment by the profession that the scope of work includes the concept that you get what you pay for. And since market analysis is a part of what the client has to get in an appraisal, make training in real estate economics, not sales, the preferred training.

  3. John Cicero says:

    Ed, Very well said. The appraisers themselves are of course to blame. When a lender puts a project out for “bid” the appraisers are like a bunch of puppy dogs wagging their tails yelping “pick me! pick me!” It becomes a humiliating game of “who can sell their labor the cheapest.” In order to deliver a report at the low fees that the lenders expect to pay, most appraisers resort to stale boilerplate which does little to educate the client about real market risks. Many lenders will skip right over the market analysis section.

    And I couldn’t agree with you more that if an “economist” or “consultant” did the identical market analysis as an “appraiser” their fees would be five times higher.

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