Posted on January 30, 2024
The 2024 Commercial Real Estate Appraisal Landscape
As we approach 2024, the commercial real estate (CRE) sector stands at a critical juncture poised to navigate through an array of economic, technological, and regulatory transformations. These evolving dynamics are reshaping the landscape of commercial property valuations, demanding a nuanced understanding and forward-thinking approach. At Lowery Property Advisors (LPA), we are committed to guiding our clients through these intricate shifts, leveraging our extensive expertise in commercial real estate appraisals, right of way and eminent domain, institutional advisory, and tax consulting.
In this article, we delve into the emerging trends and crucial developments anticipated to influence commercial real estate appraisals in 2024. Drawing upon our comprehensive market presence, research, and seasoned insight, we offer a thorough exploration of these trends – from the impact of economic shifts to the integration of advanced technologies in property assessments.
Emerging Trends and Predictions for 2024 in Commercial Real Estate Appraisal
The commercial real estate appraisal landscape is set to undergo profound changes in 2024, shaped by evolving economic forces and technological advancements. This shift presents both challenges and opportunities for stakeholders, from investors to developers. Understanding these trends is crucial for navigating the complexities of the market and making informed decisions. We uncover the key developments that are expected to drive the CRE appraisal industry in the coming year and highlight how they will influence practices, strategies, and decision-making processes in the sector.
Economic Fluctuations and Their Impact on CRE Values
2024 promises to be a year of economic flux, with ripples echoing through the commercial real estate (CRE) market and influencing property valuations in nuanced ways. From shifts in global economic trends to rising interest rates and fluctuating inflation, understanding these economic nuances is key for accurate CRE appraisals and informed investment decisions.
Let’s unpack the interplay between economic fluctuations and CRE values, exploring both the challenges and opportunities this presents for investors, developers, and appraisers alike.
Global Economic Trends:
- The International Monetary Fund (IMF) forecasts global GDP growth to slow down in 2024, dipping from 3.6% in 2023 to 2.9%. This slowdown, while modest, could impact investor confidence and dampen demand for certain property types in the CRE market.
- Geopolitical tensions and ongoing supply chain disruptions continue to pose risks to global economic stability. These uncertainties could further amplify volatility in the CRE market, particularly in sectors heavily reliant on international trade and logistics.
Rising Interest Rates:
- The Federal Reserve’s ongoing battle against inflation may continue pushing interest rates upwards in 2024. This increases borrowing costs for CRE investors and developers, potentially leading to a slowdown in new projects and transactions.
- Higher interest rates also make alternative investments like bonds more attractive, potentially drawing capital away from the CRE market and impacting valuations of certain property types, particularly those with higher risk profiles.
- While inflation is expected to moderate in 2024 compared to 2023, it remains a wild card with the potential to disrupt the CRE market. Persistent inflation could erode property values by increasing construction and operating costs, squeezing profit margins for investors and developers.
- Conversely, falling inflation could benefit borrowers by lowering financing costs, potentially reviving activity in certain segments of the CRE market. However, it could also lead to price corrections for properties overvalued during periods of high inflation.
Investor Behavior and Property Type Variability:
- Economic fluctuations will likely influence investor behavior and risk tolerance in the CRE market. Some investors may adopt a more cautious approach, seeking defensive assets like industrial properties and data centers that offer stable income streams.
- Other investors may see opportunities in distressed assets or undervalued sectors, seeking to capitalize on potential market corrections. The varying impacts of economic trends on different property types will demand flexibility and nuanced valuation methodologies from appraisers in 2024.
Technological Advancements Reshaping Appraisal Processes
The commercial real estate (CRE) appraisal industry is in the midst of a digital transformation, with cutting-edge technologies reshaping the way property valuations are conducted and assessed. From virtual tours and drone-based inspections to AI-powered algorithms and predictive models, these advancements promise to streamline processes, enhance accuracy, and unlock new possibilities for both appraisers and investors.
Virtual Tours and Remote Inspections:
- Augmented reality (AR) and virtual reality (VR) technologies are creating immersive and interactive property tours, allowing appraisers to assess key features and conditions remotely. This can save time and resources, particularly for geographically dispersed properties or hard-to-reach structures.
- Drone-based inspections are gaining traction as well, offering detailed data capture and aerial perspectives. These drones can provide insights into roof conditions, structural integrity, and surrounding infrastructure, enhancing appraisal accuracy and comprehensiveness.
Artificial Intelligence and Machine Learning:
- AI and machine learning algorithms are trained on vast data sets of real estate transactions, market trends, and economic indicators. These algorithms can assist appraisers in data analysis, property comparison, and valuation forecasting, minimizing human bias and improving report consistency.
- AI-powered tools can automate repetitive tasks like data extraction and report generation, freeing up appraisers’ time for critical analysis and client interaction.
Big Data Analytics and Predictive Modeling:
- The wealth of data available on real estate markets, encompassing property transactions, economic indicators, and social media trends, is fueling data-driven appraisal methodologies. Big data analytics tools can identify emerging trends, predict future property values, and assess risk factors, providing valuable insights for informed investment decisions.
- Predictive modeling algorithms can analyze historical data and current market conditions to generate property value forecasts with greater accuracy and granularity, assisting investors and lenders in making informed decisions about acquisitions and financing.
Cloud-Based Collaboration and Data Sharing:
- Cloud-based platforms facilitate seamless collaboration and data sharing between appraisers, lenders, investors, and other stakeholders involved in the CRE appraisal process. This transparency and accessibility enhance communication, streamline workflow, and expedite project timelines.
- Secure cloud storage ensures remote access to property information and appraisal reports, boosting efficiency and flexibility for appraisers and their clients.
In reponse to some of the recent advances, LPA’s Managing Director Danielle Watkins, MAI shares “Technology continues to change the landscape of the real estate market in all sectors. This is particularly true in non-disclosure states. Cloud-based collaboration and data sharing have increased appraisers’ ability to share comparables and other information across our offices. Technology advances in analytics have continued to help improve accuracy and quantity of information across markets as well.”
Sustainability and ESG Factors in CRE Appraisal
In the year 2024, the mantra “green is gold” rings truer than ever for commercial real estate (CRE). Sustainability and environmental, social, and governance (ESG) factors are no longer niche considerations but central drivers of property values and investment decisions. Appraisers are rapidly adapting their methodologies to integrate these crucial aspects, fundamentally reshaping the CRE valuation landscape.
The Rise of Green Buildings and ESG Premiums:
- Green buildings certified by Leadership in Energy and Environmental Design (LEED) consistently command higher rents and sell for premiums compared to their non-certified counterparts. A 2023 World Green Building Council report found that LEED-certified buildings achieved average rent premiums of 5.6% and sale price premiums of 6.6%.
- Investors are increasingly prioritizing ESG-compliant properties, attracted by their long-term value, reduced operating costs, and enhanced tenant appeal. A 2022 JLL report found that 80% of global investors are willing to pay more for assets with strong ESG profiles.
ESG Metrics and Valuation Assessment:
- Appraisers are now incorporating sophisticated ESG metrics into their valuation models. These metrics consider factors like energy efficiency, water conservation, waste management, tenant wellness, social impact, and governance practices.
- Tools like the GRESB Real Estate Assessment, which benchmarks and scores buildings on their ESG performance, are becoming increasingly used to inform valuations and investment decisions.
Challenges and Opportunities:
- The lack of standardized ESG data and valuation methodologies presents a challenge for appraisers. However, industry groups are working to develop consistent frameworks and reporting standards.
- Appraisers require training and expertise in understanding and analyzing ESG factors. LPA, for example, has implemented rigorous ESG training programs for its valuation professionals.
- Integrating ESG factors into CRE valuations is not just a trend but a transformative shift. As demand for sustainable properties rises and regulations regarding energy efficiency and carbon emissions tighten, green buildings will become the gold standard for CRE.
- Appraisers who possess the expertise to assess and value ESG-compliant properties will be well-positioned to thrive in this evolving landscape.
Will 2024 Be A Turning Point for Right-of-Way and Eminent Domain?
As we veer into 2024, the landscape of eminent domain and right-of-way in commercial real estate appraisal stands poised for a potential reshaping. Legal interpretations are evolving, infrastructure priorities are shifting, and new valuation methodologies are emerging. This necessitates a closer look at the anticipated changes in both eminent domain practices and right-of-way considerations, understanding how they diverge from historical norms and what this divergence means for property values and appraisal accuracy. 2024 certainly promises to be a rollercoaster for stakeholders navigating these legal and valuation territories.
Evolution in Eminent Domain Practices for 2024
The bedrock of eminent domain practices, “just compensation,” faces potential tremors in 2024. Legal interpretations and case precedents are anticipated to shift, impacting both the application of eminent domain and the valuation of affected properties in the commercial real estate (CRE) landscape. We’re venturing into a terrain where historical interpretations of “just compensation” might be challenged, prompting appraisers to re-evaluate their methodologies and navigate legal uncertainties with heightened vigilance.
“The availability of electronic research of federal, state, and district court decisions have the potential to open new areas of legal arguments.” Explains Alan Schmook, LoweryPA Managing Director, MAI, SRA. “The demand for litigation support has continued to expand over the last few decades. The expert witness/appraiser/litigation support personnel must stay up-to-date with the legal standards being applied in the various courts. Just because someone says, “I’ve done it in the past,” their opinion may not be relevant in today’s judicial system.”
Evolving Definition of “Public Use”:
- Recent case rulings suggest a possible broadening of justifications for eminent domain, particularly related to economic development and infrastructure projects.
- This trend could lead to an increase in eminent domain takings, even for projects with less direct public benefits, raising concerns about fairness and adequate compensation for property owners.
- Current legal definitions of “blight” are broad and subjective, potentially allowing for the taking of economically viable properties under the guise of revitalization.
- Anticipated legal developments in 2024 might tighten or nuance these definitions, potentially limiting the scope of eminent domain takings and impacting valuations of properties previously deemed blighted.
- 40% of eminent domain takings in the U.S. are for economic development projects, raising concerns about private benefit over public good.
- The average time to resolve an eminent domain case in court is 2 years, creating uncertainty and financial hardship for property owners.
Right-of-Way – New Directions in 2024
Right-of-way considerations in CRE appraisals are about to encounter uncharted territory in 2024. Emerging infrastructure projects, evolving policy priorities, and novel valuation tools promise to reshape the landscape for appraisers navigating the complex interplay between property rights and infrastructure needs.
Infrastructure Boom and its Footprint:
- Large-scale infrastructure initiatives like renewable energy pipelines, high-speed rail lines, and smart city initiatives are expected to gain traction in 2024, leading to increased ROW acquisitions and easement impacts on CRE properties.
- Prioritization might move from traditional transportation projects to renewable energy initiatives and climate-resilient infrastructure, altering the types of properties facing right-of-way impacts.
Evolving Policy Landscape
- New regulations and permitting processes surrounding right-of-way acquisitions and easement agreements are anticipated, demanding close attention from appraisers to ensure compliance and valuation accuracy.
- Increased focus on community engagement and impact mitigation measures during right-of-way projects could influence property valuations, highlighting the need for appraisers to consider social and environmental factors alongside traditional market data.
- Advanced mapping tools, drone-based surveys, and data analytics platforms are becoming increasingly available to appraisers, offering precise measurement, impact assessment, and enhanced data-driven valuation insights for ROW-affected properties.
- Collaborative valuation models involving right-of-way agencies, developers, and community stakeholders are gaining traction, promoting transparency and potentially influencing the valuation process itself.
As we conclude our exploration of the changing landscape of eminent domain and right of way in 2024, a clear message emerges: the terrain underfoot is shifting. Legal interpretations are evolving, infrastructure priorities are refocusing, and valuation tools are advancing at a rapid pace. For appraisers, this confluence of change presents both a challenge and an opportunity. By navigating these shifting sands with vigilance, embracing new methodologies and insights, and prioritizing fairness and accuracy in their valuations, appraisers can not only adapt to the changing tide but also steer the course toward a future where eminent domain and right of way considerations ensure equitable outcomes for property owners, the public, and the commercial real estate landscape as a whole.
Current State of the Union in Commercial Appraisals
The commercial real estate (CRE) appraisal market in 2024 stands at a crossroads. Economic uncertainties, evolving regulations, and technological advancements are churning the market, demanding a fresh look at appraisal practices and value assessments. In this section, we unpack the key factors driving this transformation, analyzing their impact on property values and providing insights for navigating the terrain of CRE appraisals in the year ahead.
Current Economic Influences on CRE
The commercial real estate market is a complex ecosystem, and its pulse beats to the rhythm of the broader economy. In 2024, that rhythm is anything but steady, with fluctuating interest rates, inflationary pressures, and evolving investment trends creating a dynamic and challenging landscape for valuations.
Rising interest rates cast a long shadow over the CRE market, acting as a headwind for valuations.
- The Federal Reserve has raised interest rates four times in 2023, with another hike anticipated in 2024.
- Higher borrowing costs translate to lower capitalization rates, potentially decreasing property values by 10-15%.
Inflation gnaws at property returns and pushes up construction costs, further complicating the valuation equation. Statistics paint a vivid picture:
- U.S. consumer price index (CPI) inflation remains elevated at 6.7% as of December 2023.
- Construction material costs have risen by 15% in the past year.
Investor sentiment is fickle, and capital flows shift like desert sands, impacting specific property types. Data reveals the changing tides:
- Logistics facilities and data centers are attracting record investment due to e-commerce growth and technological advancements.
- Office buildings face headwinds as hybrid work models become more prevalent.
Legislative and Regulatory Trends
The sea of commercial real estate valuation doesn’t just face economic waves; it’s also steered by ever-evolving legal currents. In 2024, legislative and regulatory changes are shaping the appraisal landscape in profound ways, demanding vigilance and adaptability from appraisers seeking to ensure compliance and market responsiveness.
Environmental, social, and governance (ESG) factors are no longer optional add-ons; they’re becoming anchors in the valuation process.
- Building codes and regulations are increasingly incorporating energy efficiency standards, impacting property values. For example, New York City’s Climate Mobilization Act mandates energy upgrades for existing buildings, potentially decreasing valuations for non-compliant properties.
- Regulatory proposals requiring disclosure of carbon footprints for buildings could further reshape investment decisions and valuations, favoring sustainable properties.
Technological advancements are not just lighthouses guiding the valuation voyage; they’re becoming integral parts of the ship itself.
- AI-Powered Valuation Tools: Artificial intelligence (AI) algorithms are increasingly utilized to analyze market data, predict property performance, and even generate preliminary valuations. While not replacing human expertise, AI can enhance efficiency and accuracy.
- Big Data Analytics: Access to vast datasets on property transactions, demographic trends, and economic indicators allows appraisers to make data-driven decisions and support their valuations with robust evidence.
Eminent Domain and Right-of-Way Crossroads:
As previously discussed, evolving interpretations of eminent domain and right-of-way practices necessitate a closer look from appraisers.
- Broadening Definition of “Public Use”: Potential legal changes could expand the scope of eminent domain takings, requiring appraisers to carefully assess justifications and ensure fair compensation for affected property owners.
- Evolving “Blight” Definitions: Shifts in legal interpretations of “blight” could impact valuations of properties previously deemed blighted for redevelopment. Appraisers need to stay informed about legal updates and their impact on specific jurisdictions.
As we stand at the threshold of 2024, the commercial real estate appraisal landscape appears less like a serene lake and more like a churning ocean. Economic tides, regulatory currents, and technological winds converge, reshaping the terrain of property valuations and demanding both agility and foresight from appraisers. This dynamic environment presents a multitude of challenges, from navigating fluctuating interest rates and evolving ESG considerations to adapting to legal shifts in eminent domain and right-of-way practices. Yet, within these challenges lie hidden opportunities.
For appraisers who embrace continuous learning, hone their expertise in emerging technologies and regulations, and prioritize a data-driven approach, this changing landscape promises new paths to success. By employing sophisticated valuation models, incorporating environmental and social factors, and remaining vigilant of legal updates, appraisers can ensure their valuations remain not just accurate but insightful, guiding informed investment decisions and shaping a future where sustainability and equitable outcomes take center stage.
It is at this crossroads that LPA stands to serve as a trusted navigator. With our deep understanding of the market, unwavering commitment to ethical practices, and investment in cutting-edge tools, training and research, we equip our appraisers with the knowledge and skill to navigate even the most turbulent waters. Learn more about Lowery Property Advisors or contact us today for a consultation.