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Just like that, it’s tax season once again. With the May deadline right around the corner, commercial property owners may find themselves in an all too familiar scramble. From assessing obligations to validating appraisal accuracy, navigating the complexities of property taxes can be a daunting process. But, it’s not the process alone that raises concern. According to a study by the National Taxpayer Union Foundation (NTUF), an estimated 30-60% of taxable properties in the United States are assessed above their true market value. 

For commercial real estate owners, this could result in paying thousands or even tens of thousands above expectation. It’s precisely in these moments that the spotlight intensifies on the critical role of tax consulting and the true value of precision commercial valuations. 

These services, in addition to ensuring compliance, actively work to reduce tax liabilities and enhance investment value for property owners. At LPA, we specialize in providing both commercial property appraisals and tax consulting services to help our clients maximize their potential cost savings and returns. 

This blog helps shed light on the balance between commercial property valuations, tax consulting, and their potential impact on your tax strategy. We aim to demystify the uncertainty surrounding these assets and provide property owners with professional insights into these processes.

 

The Intersection of Commercial Property Appraisals and Tax Consulting

Commercial property investment requires more than just a keen eye for opportunity. It demands a strategic approach to managing tax liaibility and maximizing returns. The foundation of this strategy lies in accurate property appraisals, which provide essential data for effective tax consulting. This combination can help property owners challenge unjust tax assessments or uncover opportunities to reduce liabilities. The interplay between these two services is key to successfully traversing the fiscal landscape of real estate investment.  

A Foundation for Financial Strategy

Recognizing when tax consulting becomes a critical amenity is a key insight for business and property owners. This awareness or recognition often aligns with significant events, such as: 

• Acquisition of commercial property or assets 
• Inheritance or settling an estate 
• Rapid market fluctuations or economic shifts 
• A tax reassessment that doesn’t mirror expectations. 

The value of an accurate appraisal in any of these contexts cannot be overstated. The appraisal serves as a clear, objective, evidence-based argument to contest tax assessments that might not reflect the true value of a property. These pillars not only work to protect your investment, but form the foundation for a sound and resilient financial strategy.  

Perspective from the Property Owner

Property taxes are complex and deciphering the various laws, regulations, and conditions in which they are applied, in addition to auditing tax assessments and discovering savings opportunities, can feel like a full-time job (because it is!) Many commercial investment firms and independent property owners do not have the luxury of time to navigate this process alone. This is where tax consulting and professional property appraisal services become invaluable.  

In addition to helping property owners contest their tax assessments, maximize their savings, and offload this delicate process, many tax consulting firms utilize a savings cost model where clients are charged a percentage of the amount saved – meaning property owners frequently net positive utilizing these services. 

The Tangible Benefits of Expertise

Tax consultants and certified appraisers bring specialized knowledge and a deep understanding of property valuation to the table. This expertise often translates into direct benefits for property owners, including: 

• Reduced Tax Liabilities: Accurate appraisals, combined with strategic tax consulting, can lead to fair assessments and significantly lower property tax bills. 
• Maximize Investment Returns: By minimizing tax burdens, property owners can free up capital and increase the overall profitability of property investments. 
• Peace of Mind: Knowing that tax affairs are handled by professionals brings peace of mind, allowing property owners to focus on growing their business. 

 

When and Why Tax Consulting Becomes Critical 

With an extensive history in commercial real estate valuations, Lowery Property Advisors, (LPA) has experienced firsthand how dynamic and susceptible to change our economy is. Property values fluctuate, tax laws change, and economic conditions can shift abruptly and unexpectedly. These dynamics continue to underscore the importance of proactive tax management and have shifted the perception of tax consulting from luxury to necessity. 

In order to safeguard these investments, it’s imperative for property owners to understand in what circumstances does tax consulting truly become a critical asset. Let’s explore some of the most common scenarios: 

Significant Changes in Property Valuation

Whether due to market fluctuations, renovations, or changes in a property’s usage, shifts in valuation can have a major impact on tax liability. If the property’s assessed value is inflated, a tax consultant can analyze the discrepancies and help property owner’s build a case for a reassessment. Conversely, if a property’s value has decreased and the assessment hasn’t reflected that change, working with a tax expert can ensure property owners are not overpaying. 

New Legislation or Tax Code Revisions

Tax laws are complex and can change at the local, state, and federal levels. A tax consultant stays up-to-date on these changes to ensure that property owners are fully compliant. Tax consultants also help identify any new deductions or savings opportunities that may apply to property portfolios. 

Contesting Assessments

If a property owner suspects their property is overvalued, the assessment process can seem intimidating. A tax consultant, equipped with an accurate, professional appraisal, can guide property owners through the appeal process step-by-step. The appraisal serves as powerful evidence to support their claim for a fair and accurate valuation, maximizing their chances of a successful outcome.

 

The Unrecognized Value of Tax Consulting and Appraisals

Despite any common misconceptions, a property appraisal does much more than just fill a line item during tax preparation and tax consulting extends its value well beyond helping file your tax documents. Let’s challenge those perceptions and uncover how these services are actually designed to proactively protect and grow your investments. 

Misconception #1: “Appraisals are only for when I get my tax bill.”

Fact: Accurate property valuations have wide-ranging implications for your entire investment strategy. Beyond just taxes, appraisals play a vital role in: 

• Securing Financing: Lenders rely on professional appraisals to make informed decisions about loan amounts and terms. 
• Insurance Coverage: An up-to-date appraisal ensures property owners have the right level of protection for their assets. 
• Strategic Decision Making: Identifying underperforming properties or potential sales opportunities often starts with understanding true value. 

Misconception #2: “Tax consultants just fill out forms.”

Fact: A skilled tax consultant offers proactive, year-round strategic guidance. Extended past preparing tax returns, they can help: 

• Navigate Complex Regulations: Tax laws are constantly evolving, and a good consultant ensures property owners are always in compliance. 
• Identify Hidden Savings: Tax consultants analyze unique circumstances to uncover overlooked deductions and credits. 
• Maximize Long-Term Returns: Proactive tax strategy isn’t just about this year’s bill, it’s about optimizing property owners’ investments over time. 

Misconception #3: “I only need these services if my assessment seems too high.”

Fact: Proactive tax management can make a difference even if the current assessment is accurate. A tax consultant can help: 

• Challenge Unfair Assessments: If an assessment is truly inflated, they will build a strong case on the behalf of the property owner. 
• Uncover Past Refund Opportunities: Changes in tax laws could make property owners eligible for refunds from previous years. 
• Minimize Future Liabilities: Tax consultants stay ahead of potential tax law revisions that might impact investment properties. 

 

The Economic Impact of CRE Valuations on Government Revenue 

The success of commercial real estate investors is intertwined with the economic health of the communities they operate in. Ensuring property valuations are accurate and fair is a crucial element in maintaining this delicate balance. Let’s explore why this matters to both property owners and the governments they support. 

The Risk of Declining Valuations

When property values decline, the tax revenue that funds essential services like schools, infrastructure, and public safety can also decrease. This can put a strain on local government budgets, potentially leading to cuts in crucial programs or the need to raise taxes elsewhere. 

The Importance of Accuracy

While property owners understandably want to minimize their tax burden, they also benefit from a well-functioning community. Accurate valuations ensure that everyone is contributing their fair share. This fosters a sustainable tax base that supports the investments that attract businesses and residents alike. 

Protecting Revenue and Fairness at LPA

Our team of expert appraisers and tax consultants are committed to providing accurate and on-time valuations that serve both commercial property owners and local governments. By ensuring assessments reflect true market value, we help prevent both the underpayment and overpayment of taxes. Additionally, our in-depth knowledge of complex tax regulations safeguards compliance and promotes a level playing field for everyone involved. 

Property taxes play a vital role in the well-being of our communities. By working with LPA, commercial property owners can rest assured that their tax situation is optimized while also contributing to the long-term health of the areas where they invest. 

 

Proactively Preparing for Tax Season

The most successful commercial property owners don’t treat tax season as an isolated event. Proactive planning throughout the year sets the stage for a smoother, more financially rewarding tax filing experience. Here are some tips for how property owners can stay ahead of the curve: 

 Proactive Steps 

1. Schedule an Early Appraisal: An appraisal well in advance of tax season allows property owners to address any discrepancies in their assessment proactively. 

1. Review Your Tax Strategy: Meet with a tax consultant regularly to discuss how market dynamics or tax law changes might impact tax liability. 

1. Gather Key Documents: Maintain organized records of expenses, property improvements, and any other relevant documentation. 

Gain an Advantage with Technology

Modern technology is revolutionizing the world of tax consulting and appraisals. At LPA, we utilize a suite of advanced tools to streamline processes, increase accuracy, and ultimately save our clients time and money. 

• Precision Data: Our appraisers leverage cutting-edge data analysis and valuation software to ensure your property is assessed based on the most comprehensive and up-to-date market information. 
• Enhanced Efficiency: Our technology-driven workflow reduces turnaround times and minimizes disruptions for property owners. 
• Client-Focused Collaboration:  

The earlier you start preparing for tax season, the better positioned you’ll be to maximize savings and streamline the process. Contact LPA today to discuss how our proactive approach and technology solutions can give you a competitive advantage. 

 

Choosing the Right Partner for Tax Consulting and Appraisals 

Navigating commercial property tax requires more than just technical insights. The right tax consultant and appraisal firm should serve as strategic partners working to safeguard your investment as if it were their own. Here are some key characteristics to look for when choosing the right tax consulting and appraisal partner: 

Qualifying Characteristics

• Expertise: Seek out professionals with specialized credentials and a proven track record in commercial real estate valuations and tax strategy. 
• Proactive Approach: The best partners don’t just react to deadlines; they offer year-round guidance and identify potential savings opportunities. 
• Data-Driven Methodology: Ensure their valuations and tax strategies are informed by robust market analysis and the latest industry data. 
• Client-Centric Communication: Clear communication and transparency throughout the process are essential for building trust. 

Potential Questions to Ask Providers

• “What is your specific experience in appraising [my type of commercial property]?” 
• “Can you provide examples of how you’ve successfully helped clients reduce their tax liabilities?” 
• “How do you stay up-to-date on changing tax regulations that may impact my property?” 
• “What technology do you use to ensure accuracy and efficiency in your appraisals?” 

The LPA Difference

At LPA, we understand the unique challenges faced by commercial property owners. Our team of certified appraisers and experienced tax consultants bring deep industry knowledge, a commitment to personalized service, and a focus on these key differentiators: 

• Unmatched Accuracy and On-Time Delivery: We have built a reputation for reliable valuations, consistently delivered within your time frame. 
• Results-Driven Technology: Our tech-forward approach ensures the most precise appraisals and streamlined process for our clients. 
• True Partnership Mentality: We work as an extension of your team, invested in your long-term financial success. 

For an in-depth guide to selecting a commercial real estate appraisal firm, read our article “How to Choose a Commercial Appraisal Company.” 

 

Conclusion

 Successfully managing the complexities of commercial property tax takes more than just a thorough understanding of the rules and bylaws – it requires strategic foresight and the assistance of trusted advisors. By proactively addressing valuations, leveraging expert tax consulting, and utilizing the latest technology, commercial property owners can optimize their tax positions and protect their investments.  

At LPA, we understand that trust is earned, not given. That’s why we go above and beyond to deliver precise valuations, personalized tax strategies, and transparent communication throughout the entire process. Our team is dedicated to building long-term relationships with our clients, becoming an extension of their own financial strategy team. 

With LPA as a partner, you gain more than just compliance. You gain the peace of mind that comes from knowing your tax obligations are handled with the utmost care, and your investments are positioned for maximum success. Ready to experience the LPA difference? Contact us today for a consultation and discover how we can help you take control of your tax strategy.

As we stand at the precipice of a new era in office spaces, the commercial real estate market has undergone profound transformations since March 2020. The dynamics of office buildings and commercial properties have shifted in response to the rise of remote work and the economic uncertainties that have unfolded. In this blog, we’ll explore these changes and discuss their implications for office property valuations and the commercial real estate market as a whole.

 

The Evolution of Office-Building Real Estate

Since March 2020, the landscape of the office-space real estate market has undergone a profound transformation, driven by unprecedented global events and shifts in work dynamics. The COVID-19 pandemic, with its widespread adoption of remote work and economic uncertainties, has reshaped the way businesses perceive and utilize office spaces. What was once a landscape characterized by bustling office buildings and city centers has evolved into a more complex and nuanced environment, marked by changing tenant preferences, fluctuating vacancy rates, and reimagined workspace strategies.

In this new paradigm, commercial real estate professionals must navigate uncharted territory, adapting their approaches and strategies to meet the evolving needs of tenants.

 

Anticipating Future Market Demand for Commercial Office Space

As we look ahead, several factors will influence demand for office spaces in the coming years. Some businesses may choose to continue minimizing their physical presence in a commercial space, but plenty of companies are reluctant to shift to a fully remote (or even partially remote) working environment.

“It’s tough to say what direction the demand for traditional office space will trend in the future,” said Kevin Rushing, MAI, Managing Director of LPA Houston. “We’re in a season where leases that were signed before COVID are still active, and once those leases start expiring, companies will need to start thinking about how much office space they want.”

With that, business owners have several factors to consider:

Pros & Cons for Businesses Working In-Office

Naturally, the decision to work in-office or remotely varies depending on the nature of the business and its specific needs. For certain industries, such as finance or healthcare, where face-to-face interactions or access to specialized equipment are crucial, working in office is clearly advantageous and at times necessary. In-person collaboration also fosters teamwork, facilitates real-time problem-solving, and can enhance efficiency.

Moreover, some businesses simply thrive on the synergy generated by physical proximity, leading to increased creativity and innovation.

However, the traditional office model also has its drawbacks. Commuting can be time-consuming and stressful, impacting employee well-being and work-life balance. Renting or owning office space also incurs significant overhead costs, including rent, utilities, and maintenance.

Pros & Cons for Businesses Working Remotely

On the other hand, remote work can provide opportunities for hiring talent outside one’s geographic market, expanding the pool of potential employees. It also generally offers greater flexibility and autonomy, allowing employees to customize their work environment and schedule, which can lead to increased satisfaction and well-being.

However, remote work can present challenges in maintaining team cohesion, communication, and accountability. Without a physical presence, it may be harder to foster a sense of belonging and camaraderie among team members, leading to potential feelings of isolation and disconnection. Additionally, remote work requires reliable technology and cybersecurity measures to ensure data protection and seamless collaboration.

Ultimately, the decision between in-office and remote work depends on the unique dynamics and requirements of each business; consequently, we will likely see some companies continue to move toward remote work, while others continue to push for a return to full-time in-office work.

 

A Consideration of Co-Working Spaces

Surprisingly, shared and co-working spaces have seen increased popularity despite the work-from-home movement.

“I expected these kinds of properties to decline during COVID, assuming people would want to stay home—and away from people—even more,” Rushing said. “But the opposite happened. It seemed like more people wanted a chance to get out of the house, and they began to rely on co-working spaces even more.”

Co-working spaces allow entrepreneurs and remote employees to rent commercial office space (often amongst other remote workers) for a short period, such as a day or month at a time. With shared spaces gaining traction, there remains the possibility of businesses co-renting entire buildings or floors, though this approach appears less popular, and challenges arise due to different companies’ varying equipment and setup needs.

 

Considerations of Property Types

In the wake of the remote-work movement, the office-space real estate market has witnessed a divergence in performance across different classes of properties. While class A office space continues to thrive, buoyed by its modern amenities and prime locations, class B and C office spaces are grappling with heightened vacancy rates.

This disparity underscores the changing dynamics of tenant preferences and the evolving nature of workspace requirements. The impact of remote work, with its emphasis on flexibility and adaptability, has further exacerbated the challenges faced by lower-tier office properties. As businesses embrace hybrid work models and prioritize efficiency and cost-effectiveness, the demand for traditional office spaces has waned, particularly in less desirable locations. Consequently, landlords and investors must recalibrate their strategies to align with the evolving needs of tenants and navigate the shifting landscape of the office-space real estate market.

 

The Future of Lower-Class Properties

Amidst the uncertainty surrounding class B and C office buildings, the real estate industry finds itself at a crossroads, grappling with the question of their future viability. In many cases, the limited commercial prospects for these properties prompt consideration of alternative uses, such as affordable housing, apartments, or self-storage facilities. However, the feasibility of such conversions varies depending on location and market demand, leaving demolition as a potential recourse for future development. This underscores the need for innovative solutions and strategic planning to address the evolving needs of the market and maximize the potential value of these properties.

 

Geographic Market Dynamics

Regional disparities further complicate the landscape of the office-space real estate market, with divergent market conditions shaping outcomes across different cities and regions. In rapidly growing metropolises like Dallas, robust demand for office space persists, particularly in newer, sought-after areas. However, the dichotomy between newer and older buildings remains apparent, with older structures struggling to compete in a market dominated by modern amenities and prime locations. This disparity underscores the importance of understanding local market dynamics and adapting strategies accordingly to navigate the challenges and capitalize on emerging opportunities.

 

Cap Rates & Rent Rates

Meanwhile, the shifting dynamics of cap rates and rent rates reflect the broader uncertainties surrounding the office-space real estate market. Rising cap rates for owner-occupied and older office properties trigger caution among investors, as economic uncertainties loom large.

Concurrently, rent rates exhibit varying trajectories, with newer, high-quality office spaces commanding increases in rent, while older buildings experience declines as tenants gravitate towards modern, more desirable spaces. This divergence underscores the importance of adapting to changing tenant preferences and market dynamics to remain competitive in an increasingly uncertain landscape.

 

Appraising Office Spaces in the Era of Remote Work

While the fundamental factors for appraising office properties remain consistent, the expectations surrounding these factors have undergone a notable shift in recent years. Appraisers continue to analyze data such as rent

trends, vacancy rates, and cap rates to assess the value of office properties accurately. However, the trajectory of these metrics has evolved significantly. Before and during the pandemic, cap rates were on a downward trend, rents were steadily increasing, and vacancy rates remained stable. However, since around 2021, the market dynamics have shifted, with cap rates beginning to rise, rents experiencing a decline, and vacancy rates witnessing an uptick. This reversal highlights the evolving nature of the office-space real estate market and underscores the importance of staying attuned to changing trends and adjusting expectations for commercial valuations.

 

Considerations for Business Owners

For business owners seeking to procure office space, navigating the evolving real estate landscape requires careful consideration and strategic planning.

In the realm of purchasing, investing in properties poised for appreciation is paramount. Opting for newer properties situated in burgeoning areas, with access to surrounding office and retail spaces, can offer long-term value and potential for growth. These properties not only provide modern amenities but also benefit from the upward trajectory of their surroundings, positioning owners for favorable returns on their investment over time.

For those exploring the rental market, the current climate presents a unique opportunity for tenants, particularly in the realm of class B office spaces. Management and ownership companies, cognizant of the challenges faced by these properties, are actively seeking to revitalize them and attract tenants. As a result, tenants can leverage this favorable market environment to negotiate advantageous terms, including tenant improvement allowances and rental rates. By capitalizing on these opportunities and aligning their real estate strategies with prevailing market dynamics, business owners can secure office spaces that meet their needs while maximizing value and minimizing costs.

 

Considerations for Investors

While office space can offer potential returns, it remains an inherently unpredictable asset class. As such, we typically advise against viewing office space as a primary investment property. Instead, investors may find greater success by pursuing value-add opportunities within the real estate sector. This approach involves identifying properties that have been neglected or underutilized, often available at a lower cost, and implementing strategic interventions to enhance their value. By injecting capital into these properties, marketing them effectively, and offering tenant improvement allowances to attract occupants, investors can capitalize on opportunities to stabilize and optimize the asset before divesting it for a profit. This value-add strategy allows investors to mitigate the inherent uncertainties associated with office-space investments while maximizing potential returns.

 

Advice for Lenders in the Era of Remote Work

For lenders operating within the office-space real estate market, exercising caution and conducting thorough due diligence are crucial. Given the inherent uncertainties associated with this asset class, lenders must approach each lending opportunity with a discerning eye and a comprehensive understanding of the market dynamics at play.

As always, lenders should prioritize market knowledge, staying abreast of the latest trends and developments in the areas where they operate. By familiarizing themselves with local market conditions, economic indicators, and property-specific factors, lenders can make informed decisions that mitigate risks and maximize the likelihood of successful outcomes.

Ultimately, diligent research and careful assessment are key pillars of effective lending practices in the ever-evolving office-space real estate market.

 

Navigating the Future of Office-Space Real Estate with Lowery Property Advisors

The transformation observed since March 2020 has ushered in a new era characterized by remote work, fluctuating demand for traditional office spaces, and a reimagining of workspaces. In navigating the evolving landscape of office space real estate, businesses and investors alike must adapt to shifting market dynamics and embrace innovative strategies to thrive in the era of remote work.

As businesses grapple with the decision between in-office and remote work arrangements, they must carefully weigh the pros and cons of each approach to align with their unique needs and objectives. Co-working spaces have emerged as a viable alternative, catering to the evolving needs of remote workers while providing flexibility and convenience.

Meanwhile, the fate of class B and C office buildings remains uncertain, prompting considerations of alternative uses and redevelopment opportunities.

In this dynamic landscape, Lowery Property Advisors (LPA) stands ready to assist businesses and investors with comprehensive commercial property valuation and appraisal services. With a full range of expertise spanning various property types coupled with access to in-depth data, LPA delivers accurate reporting and timely insights to empower informed decision-making. Whether assessing the value of traditional office spaces or exploring unique investment opportunities, LPA offers unparalleled expertise and support to navigate the complexities of the modern real estate market. As businesses and investors chart their course in this evolving landscape, partnering with LPA ensures access to the insights and guidance needed to navigate uncertainty and seize timely opportunities. For more information about LPA visit https://lowerypa.com/ or contact any of our offices for your commercial real estate valuation needs.

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. 

 

Fluctuating Inflation: 

• 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. 

 

Future Outlook: 

• 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. 

 

Redefining “Blight”: 

• 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. 

 

Key Facts: 

• 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. 

 

Valuation Tools: 

• 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. 

 

Interest Rates:

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:

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. 

 

Property Types:

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.  

 

Sustainability Standards:

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. 

 

Technology:

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. 

 

Conclusion 

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. 

As we near the end of the year and approach the final deadlines of 2023, there’s one last story we’d like to share with you:

 

When all through the city, not a client was stirring

for they were sitting pretty.

The work files were assembled in a folder with care, and an LPA appraiser soon would be there.

The bankers were nestled all snug in their beds, while visions of good comps danced in their heads.

All guidelines to be followed per USPAP, the address had been entered into the map.

When out of doors there arose such a clatter, I sprang from my chair to see what was the matter.

Away to the window I flew with a flash, pulled up the shade and threw up the sash.

The moon on the breast of the new fallen snow, gave a luster of mid-day to objects below.

When what to my wondering eyes should appear, but an appraiser type had just arrived here.

With a shirt with colors maroon, white and gray, well, I knew in a moment it must be LPA!

More rapid than eagles their reports they came, the analysis and data puts others to shame.

On hotel, on office, on industrial and retail, on car wash, on self-storage, they leave out no detail.

To the top of the building to the edge of the wall, LPA truly covers it all!

As dry leaves that before the wild hurricane fly, when they mount to an obstacle mount to the sky.

With LPA consulting I knew through and through, the valuation would be solid and the numbers true.

 

There’s more to this tale, but you must click here, to ensure your holidays are merrier, brighter, and filled with great cheer.

Merry Christmas and Happy Holidays from everyone at LPA!

Navigating the complexities of national economic trends is critical to understanding their impact on commercial property valuations. These trends can have profound implications on investment decisions, market dynamics, and long-term strategic planning within the commercial real estate sector. At Lowery Property Advisors (LPA), we prioritize providing our clients with comprehensive and insightful analyses that reflect these economic influences. Our expertise in commercial real estate appraisals, enriched by our extensive presence across the Southwest, positions us to offer nuanced and actionable guidance in this ever-changing market landscape.

In this article, we’ll explore the key economic trends that are currently shaping commercial property valuations. From the impacts of fluctuating interest rates to the evolving landscape of technology in real estate, we’ll provide you with the essential knowledge needed to traverse these complex economic waters.

Current Economic Trends and Their Direct Impact on CRE Valuations in 2023

The landscape of commercial real estate is invariably shaped by the ebb and flow of the broader economy. In 2023, we are witnessing a unique confluence of economic factors that directly influence commercial property valuations. From the anticipation of a moderate recession to the impact of the Federal Reserve’s rate hikes, each element plays a crucial role in determining the market’s trajectory. Additionally, sector-specific trends in industrial leasing, the multifamily market, and office space dynamics are redefining investment and valuation strategies. Understanding these trends is not just about responding to current market conditions; it’s about strategically preparing for the future in an industry where change is the only constant.

Recession and GDP Growth

CBRE’s midyear review in 2023 predicts a moderate recession extending into early 2024, revising the GDP growth forecast to 2.0% for 2023 and a downward adjustment to 0.7% for 2024. These changes reflect a resilient yet slowing economy, impacting CRE investment decisions. The anticipated recession, marked by this slowed economic growth, is expected to create a cautious environment among investors and developers in the CRE sector. This caution is likely to lead to more conservative investment strategies, prioritizing stability and long-term growth potential in commercial properties. Additionally, the revised GDP forecasts suggest a shift in market dynamics, possibly affecting the demand and valuation of certain property types more significantly than others.

Interest Rates

The Federal Reserve’s rate hikes, peaking between 5.25% to 5.5%, are intended to curb high inflation. This steep rate-hiking cycle influences borrowing costs and investment dynamics in CRE, with expectations of rate decreases starting in 2024. The higher interest rates result in increased financing costs for property acquisitions and developments, potentially leading to a slowdown in new CRE projects and transactions. These higher costs might also prompt investors to reassess yield expectations and risk assessments, possibly shifting interest towards properties with more stable income streams. However, the anticipated decrease in rates in 2024 could signal a more favorable borrowing environment ahead, potentially reinvigorating investment activity and development projects in the CRE sector.

Industrial and Logistics Leasing

Surpassing expectations, this sector is on track to reach significant activity levels by year-end. This robust performance is driven by sustained demand for warehousing and distribution spaces, particularly fueled by the continued rise of e-commerce and supply chain realignment. Higher rent growth in emerging markets is a reflection of this strong demand, as businesses scramble to secure strategically located spaces for logistics operations. However, alongside this growth, there’s an observed increase in vacancy rates. This rise in vacancies is primarily due to tenant requirements evolving more slowly than the pace of new construction, resulting in a temporary surplus of available space. As the market adjusts to these changing requirements, we may see a realignment of construction projects to better match the nuanced needs of modern logistics operations, potentially stabilizing vacancy rates in the future.

Multifamily Market

​​The multifamily market has exhibited resilience and growth, with new construction and absorption levels surpassing initial forecasts. This trend indicates a sustained demand for multifamily housing, likely fueled by various factors including demographic shifts, urbanization trends, and affordability challenges in the single-family housing market. However, there’s a noticeable downward revision in annual rent growth, which can be attributed to lower Consumer Price Index (CPI) inflation expectations and changes in the employment outlook. The tempered inflation expectations suggest that the rapid rent increases seen in previous periods might stabilize, bringing some relief to renters. Meanwhile, the employment outlook, which directly influences consumer spending power and housing affordability, plays a crucial role in determining rental demand and pricing. If the job market remains robust, it could support continued demand in the multifamily sector, but any downturn might lead to adjustments in rent growth projections and investment strategies.

Office Market Dynamics

The office sector is currently undergoing significant changes. High availability rates are leading to a noticeable reduction in new space deliveries, as developers respond to the market’s current state with caution. This trend is contributing to an increase in the overall U.S. office vacancy rate, reflecting a period of adjustment as the market grapples with post-pandemic shifts in work patterns, including the rise of remote and hybrid work models. These shifts have led to a reevaluation of office space requirements, with many businesses opting for smaller, more flexible office spaces or even relocating to less traditional office markets.

Despite these challenges, demand for prime office space remains robust in fast-growing markets like Austin, Dallas, and Nashville. These markets are attracting businesses due to their strong economic growth, favorable business climates, and quality of life factors. As a result, prime office spaces in these areas continue to see healthy demand, underlining a trend towards a flight to quality where top-tier office spaces in desirable locations maintain their appeal. This resilience in prime office space demand suggests a bifurcation in the market, where well-located, high-quality office properties perform strongly even as other segments face headwinds.

Real Estate Market Dynamics

The dynamics of the real estate market, particularly in commercial sectors, are deeply influenced by the interplay of supply and demand, demographic shifts, and the cyclical nature of the industry. These elements, often interconnected, create a complex tapestry that dictates property values, investment viability, and market opportunities. Understanding these dynamics is not just crucial for appraisers and investors; it’s fundamental for anyone engaged in the commercial real estate space, as these factors collectively shape the market’s present and future landscape.

Impact of Supply and Demand Fluctuations on CRE Values

Recent trends show a mixed picture in commercial real estate (CRE), partly due to economic uncertainties and changing market dynamics. For instance, while interest rates have risen sharply, inflation has shown signs of declining​​. This has led to a more cautious environment in the CRE sector, impacting loan availability and investment decisions. Specifically, there’s an increase in available CRE spaces across various sectors, including retail, office, multifamily, and industrial, with each sector responding uniquely to these economic shifts​​.

Effects of Urbanization Trends and Demographic Shifts

Urbanization continues to significantly influence the CRE market. The multifamily sector, for example, saw a 27% increase in delivered units over the past year, indicating a strong demand driven by urban migration and demographic changes. This sector is expected to remain robust, buoyed by favorable demographics and a strong job market, despite a slight increase in vacancy rates​​. Additionally, changes in work patterns post-pandemic, such as the rise of remote and hybrid models, have led to a record high office vacancy rate of 13.5%, underscoring the sector’s ongoing adjustment to new realities​​.

The Role of Real Estate Cycles in Valuation

The real estate market’s cyclical nature is evident in the current trends. For instance, the industrial sector, while slowing from its previous highs, has returned to pre-pandemic levels, with rental costs still growing but at a moderated pace​​. The retail sector, on the other hand, has shown remarkable resilience, with vacancy rates remaining stable and consumer spending in physical locations recovering swiftly, indicating a strong post-pandemic rebound​​. The hospitality sector, too, has seen a surge in demand, with revenue per available room now more than 13% higher than its pre-pandemic level, signaling a robust recovery in this space​​.

The Influence of Government Policies and Regulations

The regulatory landscape in commercial real estate is undergoing significant shifts, driven by both evolving market conditions and government initiatives. Understanding the impact of these changes is crucial for stakeholders in the commercial real estate sector.

Zoning Laws and Tax Policies

• ESG Disclosure Requirements: Real estate firms are increasingly focusing on Environmental, Social, and Governance (ESG) compliance, with only a small percentage currently prepared for immediate implementation of new regulatory requirements. This shift toward ESG considerations is influencing investment strategies and property valuations​​.
• Tax Regulation Trends: The real estate industry is closely monitoring global trends in tax regulation, including increased tax rates and changes to transfer pricing/profit-sharing. These trends highlight the need for real estate companies to increase transparency and consider the tax implications of ESG initiatives. For example, tax credits may be available for qualifying activities under new or forthcoming legislation​​.

Government Incentives for Adaptive Reuse

• Adaptive Reuse of Office Properties: There’s a growing focus on converting underutilized office properties into residential buildings, driven by high office vacancy rates and a nationwide housing shortage. This trend is being supported by federal incentives aimed at encouraging adaptive reuse, addressing both the surplus of office space and the need for affordable housing​​.
• Economic Impact of Pandemic and Remote Work: The work-from-home trend, solidified during the pandemic, has led to high office vacancy rates and significant economic implications. This includes a reduction in real estate asset values, affecting state and local government revenues from property taxes​​.
• Environmental Benefits and Regulatory Challenges: While converting commercial buildings to residential use offers environmental benefits, challenges like high conversion costs, zoning restrictions, and building codes have limited its broader implementation. However, several states and cities are enacting policies to reduce these barriers and provide financial incentives. Examples include legislation in California and initiatives in Chicago and New York City aimed at facilitating property conversions and addressing housing shortages.

These regulatory changes and government initiatives are reshaping the commercial real estate landscape. By understanding and adapting to these trends, real estate professionals can better navigate the complexities of the market and capitalize on new opportunities.

Impact of Emerging Technologies on Property Valuations

Technological advancements, particularly in proptech, are not only transforming operations in commercial real estate but also significantly influencing property valuations.

Smart Building Technology and Valuation

The integration of smart building technologies enhances the appeal and functionality of properties, thereby increasing their market value. Smart buildings, equipped with IoT and automation systems, offer enhanced energy efficiency, security, and occupant comfort. These attributes are increasingly valued in the commercial real estate market, leading to higher valuations for properties that boast such advanced features​​.

Efficiency and Cost Reduction through Proptech

Operational efficiencies gained through proptech solutions directly affect the bottom line of property management, making properties more attractive to investors. By automating tasks and improving operational processes, these technologies reduce costs and errors, contributing to better financial performance and, consequently, higher property valuations​​.

Predictive Analysis and AI in Valuation

AI and machine learning play a crucial role in predictive analytics, helping appraisers and investors make more informed decisions about property values. These technologies enable a deeper analysis of market trends, occupancy rates, and rental income potential, providing a more accurate and dynamic approach to property valuation. As highlighted in our recent blog post, AI’s ability to assist in understanding market dynamics, forecasting future trends, and estimating the true value of properties based on a plethora of variables is invaluable for accurate appraisals.

By harnessing these technological advancements, commercial real estate professionals can enhance property valuations, optimize operations, and stay ahead in a rapidly evolving market. The integration of smart technology and AI into real estate not only improves operational efficiency but also contributes to more accurate and dynamic property valuations.

Predicting Future Trends in Commercial Real Estate Valuations

Economic and CRE Market Outlook

The economic outlook for the coming years is shaping the commercial real estate (CRE) landscape. Deloitte’s 2024 commercial real estate outlook highlights several key factors influencing property valuations:

• Expense Mitigation: A significant focus on cost reduction, especially in talent and office space, reflects an environment where revenue expectations are at their lowest since 2018. This trend could influence property valuations, especially in sectors where operational costs are a major consideration​​.
• Cost of Capital and Availability: Approximately 50% of respondents expect cost of capital and capital availability to worsen through 2024, which could impact investment decisions and valuations in CRE​​.
• Cyber Risk: The growing concern about cyber risk, especially as smart technologies become more prevalent in buildings, indicates a shift in factors considered in property valuations​​.

Changing Property Sector Dynamics

• Leasing Fundamentals: There are expectations of worsening leasing fundamentals, including vacancies, leasing activities, and rental growth, which will likely influence property valuations over the next 12 to 18 months​​.
• Shift in Attractive Property Types: Digital economy properties (data centers, cell towers) are now viewed as the most attractive risk-adjusted opportunities. The office sector, both downtown and suburban, has dropped significantly in attractiveness, reflecting the impact of hybrid work models on property valuations​​.
• Remote Work’s Impact on Office Valuations: The remote work trend continues to disrupt office space demand. Despite job additions, the office sector has seen significant space and valuation declines. There is a clear trend towards quality, with newer, high-quality assets outperforming others​​.

Sector-Specific Trends

• Industrial Market Strength: Continued demand for industrial spaces, driven by e-commerce and third-party logistics, suggests sustained competition and rent growth, positively impacting valuations in this sector​​.
• Multifamily Rental Demand: Interest rate hikes have led to a decline in home sales, subsequently increasing the demand for multifamily rental properties. This trend suggests continued rent growth and robust valuations in the multifamily sector​​.

In summary, the future economic projections indicate that commercial real estate valuations will be influenced by a combination of economic factors, including cost mitigation efforts, capital availability, cyber risk considerations, and changing preferences towards property types. The ongoing shift towards digital economy properties, the impact of hybrid work models on office space, and sustained strength in the industrial and multifamily sectors are key trends that CRE professionals should consider in their valuation strategies.

Navigating the Future of Commercial Real Estate Valuations

As we look back on the key points discussed in this article, it’s clear that the commercial real estate (CRE) landscape is undergoing significant transformations driven by a variety of factors, including economic trends, sustainability, and emerging technology.

In conclusion, the need for continuous monitoring of these trends is essential for anyone involved in CRE. Staying informed and engaged with the evolving market dynamics will enable investors, developers, and appraisers to make informed decisions and strategically navigate the complexities of CRE valuation. As we move forward, adapting to these changes and leveraging the insights gained will be key to success in the commercial real estate market.

At LPA, we understand a deep knowledge base steeped in the most accurate market data is critical, and we are committed to providing that level of service for our clients.

To learn more about LPA’s commercial property appraisal services visit www.lowerypa.com.

It’s no secret that Generative AI use has exploded in 2023. Once the stuff of fiction, the technology is now everywhere, with a third of organization leaders saying they now regularly use AI tools, according to a recent survey.

There’s no denying the impact that AI is having on our daily lives. So, how will AI change commercial real estate and commercial appraisal? LPA Senior Associate Researcher Andrew Burns and Research Associate Ashley Travis weigh in on what’s happening and what it means for you.

AI is Already Having a Direct Impact on the Data Center and Industrial Markets

Data centers have been a growing CRE asset class over the past several years as businesses expanded cloud services, consumers embraced streaming content, smartphone use became universal, and social media replaced traditional media as a primary source of information. The switch to remote education and hybrid work during the pandemic further fueled the demand for data processing and storage.

“As AI becomes more popular and more in demand,” says Andrew, “the need for more data centers, and additional industrial warehouses, is going to increase. AI uses up so much more energy and power than normal software that current data centers are running out of power, and room, to keep up with demand. Companies are either going to spend money to build more data centers or lease industrial warehouses, but either way, the data center and industrial markets are going to benefit.”

The computing power needed to meet today’s demands require state-of-the-art facilities with advanced HVAC systems, abundant, reliable power supplies, and strong security. Maintaining and updating an in-house data center can be cost-prohibitive for many businesses, creating a need for data centers to provide space, power, cooling systems, and physical security. This demand has resulted in a strong market for data center real estate with features that vary based on data center type.

The Impact of AI in CRE will be Felt in Both Expected and Unexpected Locations

Data center capacity, measured in megawatts, is not growing fast enough to meet demand, which in turn is pushing up lease costs. CBRE reports that data center customers in Northern Virginia have seen a nearly 8 percent rate increase over the past year, while Silicon Valley rates are up 43 percent over the same period. And demand continues to rise despite the inflated prices, opening new opportunities for CRE investors.

JLL Research estimates that the real estate footprint of AI companies will reach 1.6 million square meters by the end of 2023. Major metro areas with established tech markets are seeing the most data center development, with the most growth occurring in the Washington D.C./Northern Virginia region, Silicon Valley, and Dallas/Fort Worth.

According to Ashley, “It seems as though the cities with the biggest tech imprints are benefiting significantly more than the rest of the cities. This is due to the existing technological infrastructure in place, including established tech companies and research universities. Being able to tap into the research and data that these colleges and companies provide gives certain cities a leg up on the rest.”

Developers must, however, also consider the cost of land when scouting a site. Tier 1 cities are experiencing a considerable rise in land prices, pushing developers to the suburbs and rural areas. For example, over the next 20 years, Amazon plans to invest $35 billion to expand its data center business in Virginia’s northern suburbs. As Ashley notes, “Areas with large plots of land available have the potential to benefit from the AI boom. Vacant office buildings could also potentially be converted into data centers.”

Greater Demand May Mean Higher Construction Costs and Property Values

While the pandemic-related surge in construction costs has abated, supply chain issues and labor shortages continue to affect building costs. Datacenter structures may resemble ordinary warehouses, but the vast amount of energy they require (nearly 2 percent of the nation’s electricity use, according to the U.S. Department of Energy) demands that centers be equipped with costly energy-efficient hardware and state-of-the-art HVAC systems. Additionally, the growing demand for data processing and storage facilities is inflating land prices in areas best suited for data center development.

AI is also Creating Efficiencies in CRE

Even as prices rise, CRE owners and management companies may be able to tap the power of AI to streamline costs.

“Based on my experience,” says Andrew, “AI has made construction less expensive. This is due to AI being able to optimize the allocation of labor and materials, quality control the work, and overall make things more efficient. AI has become and will continue to be an integral part of the construction as it lowers costs, enhances site safety and maintenance, and increases overall efficiency.”

And as with robotics in the automotive industry and autonomous checkout systems in retail, AI has the potential to reduce labor costs. Technology such as AI can free employees to do the work that only humans can do — innovate, create, and make connections with customers and clients.

“AI can help employees do their job more efficiently and be a great complement to their success,” says Ashley, “or it can potentially make employees obsolete. Overall, it depends on how each company will use AI in the workplace, either to help their employees or work closer to automating their company.”

Andrew sees the potential impact as well. “Companies need to start learning how to best utilize AI or else they risk being left behind by their competitors. AI in the CRE marketplace can be a game changer for certain companies, depending on usage, that would help streamline analytics and increase efficiency. However, clients still want the human touch, so there would need to be a balance of human interaction and AI usage.”

Artificial Intelligence is no longer just an unsettling concept found in science fiction. It has gone mainstream. It isn’t an enemy to be feared, but it is going to have an ever-increasing part in shaping the world of commercial real estate with impacts on commercial appraisals. Those who embrace the changes AI is fostering will find new opportunities open to them as a result.

The team of experts at LPA can help you understand these opportunities and provide the intelligence you need to make informed decisions about your property. Contact us today to learn more about the impact of AI on commercial real estate and for all your commercial real estate valuation needs