One Step Further

2. One Step Further Practical Implementation of Guide Note 12

3. The Problem • Equilibrium - The theoretical balance where demand and supply for a property, good or service are equal. Over the long run, most markets move toward equilibrium, but a balance is seldom achieved for any period of time.

4. The Problem • Real estate markets characterized by cycles (gradual or boom-and-bust) • An appraisal can quickly become outdated

5. The Problem The Appraiser’s Role: • The appraiser’s perspective • The client’s perspective Point of Agreement: • Value at a single point in time may not be adequate for some intended uses

6. The Solution – Guide Note 12 • Two risks in use of an appraisal: • Value opinion is unreliable due to lack of quality data (or analysis) • Value might not be sustainable over time

7. The Solution – Guide Note 12 • Factors of change vs. symptoms of change • Capital markets and fundamental markets each cause markets to change • Market analysis (6 steps) allows the appraisal to be forward looking • Unforeseen events can invalidate conclusions of market analysis

8. The Solution – Guide Note 12 • As appropriate, reconciliation should discuss the likelihood the value might not be sustainable into the foreseeable future

9. Concerns about Guide Note 12 • Predictions are not meaningful • Risk of a lawsuit • Clients will not like it • More work with no additional compensation

10. Real Estate Market Cycles

11. Real Estate Market Cycles • Capital markets • Equity capital (investors) • Debt capital (lenders) • Fundamental markets • Space users

12. Tools for Analyzing Cycles • Entrepreneurial Incentive • Minimum necessary to justify construction • Not potential profit at a given point in time • Concept of positive external obsolescence • Challenges to application

13. Tools for Analyzing Cycles Frictional Vacancy – vacancy unrelated to disequilibria in supply and demand… a typical vacancy rate in a given market operating in equilibrium.

14. Tools for Analyzing Cycles Feasibility Rent – the rent necessary to justify new construction. • When the market is at equilibrium, the rental rate for new, fully functional space is equal to feasibility rent.

15. Tools for Analyzing Cycles

16. Tools for Analyzing Cycles Equilibrium Rent – what market rent should be for a subject property, assuming the market is at equilibrium (hypothetical)

18. Tools for Analyzing Cycles Affordability Analysis Affordability Index – a measure that indicates potential buyers’ ability to purchase a home

21. Tools for Analyzing Cycles

22. Tools for Analyzing Cycles

23. Tools for Analyzing Cycles

24. Tools for Analyzing Cycles

25. Tools for Analyzing Cycles • Market Analysis (6 step process) • Property productivity analysis • Market delineation • Demand analysis • Supply analysis • Marginal demand analysis (comparison of supply & demand) • Projection/forecast of subject capture

26. Tools for Analyzing Cycles

27. Determining Current Market Stage

28. Contraction Expansion Equilibrium Equilibrium Recovery Recession Midvale Office Market Reporting Conclusions Midvale Office Market

29. Reporting Conclusions

30. Analyzing Capital Markets • Equity market • Capitalization rates and yield rates • R = Y - CR • Debt Market • Interest rate and terms • Underwriting criteria (LTV, • Marginal demand analysis (comparison of supply & demand • Projection/forecast of subject capture

31. Conclusions One step further called for by Guide Note 12 means: • Appraisal becomes more valuable tool • Future of appraisal profession is brighter