Com./Ind. Sales Volume Up

C&I Sales Volume Up

BUYERS, SELLERS, BROKERS, lenders, and appraisers -- even assessors -- are finding it a bit easier to estimate the value of commercial real estate today than during the past five or six years. During the early 1990s, most of the few sales available were foreclosure sales, lender-owned properties, or auction sales. Historically, these sales didn't fit the mold of "arms-length" transactions. So many responsible for producing value estimates were reluctant to use them as benchmarks to aid in establishing comparative value for other properties.

[Percentage of Those Seeing Below Avg. Volume of C and I Sales April 1993 Through April 1997]

Source: FDIC, Survey of RE Trends

Those Seeing Below Avg. Volume of C and I Sales

Area	Apr-93	Apr-94	Apr-95	Apr-96	Apr-97
US	53%	34%	33%	25%	14%
N. East	75%	55%	45%	34%	23%

Source: FDIC, Survey of RE Trends

During the mid-1990s, foreclosure type activity waned, yet normal "arms-length" sales activity remained below historical levels. With so few sales (of any type) with which to work, this often required the use of more esoteric, less direct valuation techniques, producing less-reliable value estimates.

Although textbook theory (sometimes esoteric) often can produce accurate results, not all buyers and sellers read the textbook before negotiating a value for a property. So despite the theories, without an active marketplace, many of the assumptions needed to develop these theoretical approaches were based on one person's opinion or based on value inferences one, two, or three steps removed from direct market sales activity.

When the facts of the marketplace (sale price per unit, etc.) defer from a more esoteric, theory-derived value result, the facts of the marketplace (if enough data exists) take precedence. If a gulf exists between theoretical values and direct market reality-based values, this means one's theoretical assumptions need refinement to better reflect the real world of the marketplace, not that the market is wrong.

Contrary to what some self-important valuation "experts" (or those with other motivations) will tell you, it's not that the market is wrong or that the subject property is so unique that its value is not dependent on the market. Simply, one or more of the assumptions in their theoretical approach wasn't right. Direct market-derived rates and sale prices per unit from the most comparable sales, etc. are always considered the best evidence of value. When other approaches to value conflict, (in most cases) the market wins.

So with increasing commercial "arms length" sales volume, it should now be easier to estimate value more accurately -- and with greater certainty.

[Steve's Signature]
Stephen Traub, ASA
Publisher, PVM ^SM

The author, Stephen Traub, ASA, is Chief Commercial Appraiser for Property Valuation Advisors, Newburyport, MA. He is a certified general appraiser in NH, ME and MA. He can be reached at 978-462-4347 or:
by e-mail: straub@shore.net