Appraisal in the Time of Coronavirus

Credible Appraisals in a Kangaroo Market

Appraisers don’t have crystal balls but we’re pretty good at forecasting the future based on the market data we do have. But what happens when we find ourselves in an unprecedented pandemic with data that isn’t exactly on trend? “We have been in this pandemic for at least 6 months, certainly the data that can be extracted is meaningful”, says founder and President Charles Argianas, “Adam Smith’s Invisible Hand will always push the market to reach equilibrium.”

So what is the new equilibrium? After close to three decades of experience, our team remains cautiously optimistic long term. Clients seeking answers and assurance in unstable markets seek answers as to property risks. In short, appraisals during a market in flux are best completed with as much time and effort spent on property risks as time spent on formulating a property’s value estimate.

disclose & qualify!

Caveat Emptor! – Let a purchaser, who ought not be ignorant of the amount and nature of the interest which he is about to buy, exercise proper caution. While real estate appraisals are recommended and most often required by borrowers, creditors, and/or financial institutions, the content and quality of the report should carefully address market supply/market demand, and highest and best use. If issues cannot be resolved and the appraisal is still needed, good appraisers disclose the unknowns and complete their valuations subject to reasonable risk assumptions as to what risks can be assumed.

Being in the pandemic for the past 6 months, many in the markets have accepted the known unknowns, the concept made famous in economist Nassim Taleb’s book, “The Black Swan: The Impact of the Highly Improbable”. As we navigate times of market uncertainty, there are areas that your appraiser should focus on when approaching the three methods to valuation. Good appraisers almost always disclose and qualify the unknowns to the intended user of the appraisal report. Clients and/or intended users frequently cannot provide complete property details for valuation purposes because such details are unknown. In these instances, the appraiser discloses and qualifies the uncertainties and a value estimate is prepared subject to these assumptions (referred to as extraordinary assumptions in appraisal nomenclature):

  • Sales Comparison Approach – The previous 6 months provide data that must be used when available. Broker based marketing offerings on market trends are useful, but during times of market instability, your appraiser should be referencing and using data that is updated as recent as the previous month, sometimes even more current. Stale data leads to poor analysis. And insofar as the sales (comps), the appraiser needs to research and report upon whether any of the sales sold under duress/auction, included personal property or a going concern business. Other concerns include whether the sale was non-arm’s length or if it involved owner-assisted financing. There are many reasons a sale should not be used as a comparable without adjustments, for example, transfers involving fractional/partial interest, buyer motivations prompted by Starker 1031 Exchanges, and other reasons too many to list here.


  • Income Capitalization Approach – Our professional experience, especially over the last six months, has been that borrowers are still willing to pay for quality product. Cap rates should be supported and financials exhaustively reviewed. National credit tenants generally provide less risk, but is the tenant in an industry that has been impacted by Covid-19? Is the property under duress? There is no one correct answer but critical thinking needs to be applied to derive a credible income approach. Class A rents may not experience the same depletions as Class C rents. Hotels, travel, entertainment and other Covid-19 impacted industries are obviously experiencing artificial negative downward pressures, this certainly will change when the pressure of Coronavirus is removed.


  • Cost Approach – The first part of a good cost approach is a highest and best use analysis, i.e., whether a property is worth more as a redevelopment tract (land value minus demolition costs). The pandemic has brought with it great difficulties in supply and demand and some industries are unable to keep up with changes in the way buyers and sellers transact business (on-line shopping vs. personal visits to brick and mortar stores).  The demands and the prices of goods are reflecting these dynamic shifts. New construction, for which the cost approach is most applicable, should reflect any costs that are now higher than usual. With interest rates at their currently low rates, the cost to construct new product needs to be balanced against the decision to purchase existing product. And at this time, global coronavirus concerns have disrupted construction supply chains and this impact remains uncertain.

These disclosures/qualifications to value should be clear and found in the appraiser’s letter of transmittal in the form of extraordinary assumptions, the introduction of the report, and within the approaches to value. The report should also contain a Covid-19 disclaimer statement supporting that any intended user exercise caution.

exacerbation, opportunity & adaptive re-use

Prior to the pandemic there were already shifts in demand as millennials began to leave crowded cities in favor of suburban locales and lower density markets according to the National Association of Home Builders Home Building Geography Index. As city populations weigh the benefits of living in dense urban spaces and as white collar businesses incorporate work from home/remote settings, space users may find that they can function with significantly less space than before. The National Association of Industrial and Office Properties has forecast a negative absorption for office product for the next four quarters. Other property types have fared better, logistics and industrial real estate have become more important and valuable assets to store product that has not moved due to the quarantine were already important with the growth of e-commerce. Some industries will need to shift and coronavirus has accelerated this change. If history and adaptive re-use is any indication, one only needs to look at the beautiful lofts of Printers Row in Chicago or the shift to residential properties in Manhattan overlooking Central Park, or grocery stores that have become outpatient medical clinics. Whatever their impact (changes to the equity position, investors tolerating less risk, or lenders modifying their underwriting/protection processes) the expert team at Argianas will be there to serve you throughout the journey.

If you need assistance with your next real estate valuation during these disruptive times, call us at 630.390.0113, email us at [email protected] or complete this form. Be sure to join our mailing list to receive our newsletter.