The optimistic, long-range revenue projections that were popular during the economic boom for valuing commercial buildings have lost favor as a result of the recent recession, and have been replaced with more sober, near-term figures, a top Grubb & Ellis appraiser said.
The industry shift to a more conservative approach follows drops in building values of more than 30 percent in Manhattan properties between 2007 and 2010, Robert Von Ancken, executive managing director of valuation and advisory services at Grubb & Ellis, said. He was speaking this morning in Midtown at an event organized by the Mortgage Bankers Association of New York.
The new approach, which Von Ancken referred to as direct capitalization, looks at actual income and expense over only the first few years, instead of the 10-year analysis of projected rents, known as discounted cash flow.
“Appraisers are just getting away from emphasis on the [discounted cash flow] analysis, and placing more reliance on what would be called direct capitalization, using actual income and expense,” over several years, he said.
While he did not directly compare the two methods, he showed that under the 10-year valuation system used during the boom — which included a 3 percent increase in rents each year, compounded — a hypothetical building would be worth 20 percent more than one in which the rents remained flat for the first three years.
Nevertheless, lenders still wanted the 10-year analysis as part of a buildings evaluation.
“[Banks] still require the 10-year discounted cash flow. You have to do it. You have to include it, even though it is so speculative,” he said.
Commercial leasing attorney Edgar Gentry, of counsel at the law offices of Celia Clark, who was at the meeting, said lenders and property owners are reluctant to get burned again.
“I think it is a material change,” he said. “I think [lenders and commercial owners] are motivated in large part by fear,” after losing money over the past several years.