Commercial Real Estate Values Continue to Slip: Is there a Silver Lining?

What is the Silver Lining? Possible Lower Tax Valuations Next Year

I realize that falling RE property values is a big concern to property owners everywhere. Especially the one's trying to sell their property right now. If you are able, this is a great time to purchase Commercial Real Estate. Borrowing constraints can be difficult but not impossible and rates are very good. The silver lining for those owners planning on possessing their property for the next few years might be found by having a Property Tax Re-Assessment at the beginning of 2010. I know of many that have already done so this year with good success. If you missed the deadline to do so this year, good. Remember that property tax schedules are always a year in arrears. Therefore a re-assessment next January will look at property values in January of 2009. According to some in the appraisal industry, values this year are more than 20% lower than in 2008.

I received a very nice email from Gary Barker who is a commercial appraiser colleague in the local Akron, Ohio market. His company is called Akron Appraisal Group, Inc. His comments about tax valuation and assessments are worth sharing. Additionally he also provides his opinion as to the reason for the lower values relating to vacancies and CAP (Capitalization) Rates. In his email he reprinted a small article from one of his trade publications. that article can be found by following the LINK below:

http://www.appraisalinstitute.org/ano/current.aspx?volume=10&numbr=9/10#7243

The email from Mr. Barker is as follows:

To friends, clients and colleagues,

Below is an article I received today from an appraisal trade magazine (Appraisal Institute Appraiser News Online Headlines, Last Updated: May 6, 2009, Vol. 10, No. 9/10).

This is a great illustration of the issue of tax valuation. While many feel their tax value is too high it is important to point out that taxes paid this year (2009) are based on the value as of January 1, 2008. Next year taxes will be based on value as of January 1, 2009. The below research suggests that across the board values have decreased substantially over the last 12 months. While that presents little relief at the moment, next year's tax bill should be lower.

I suspect most (yes...most) commercial property owners should appeal their tax valuation in 2010 based on the market value on January 1, 2009. I advise taking a very careful snapshot of your property right now. What is your occupancy rate? When was your last tenant signed and what was the rate? What are your monthly expenses?

Why have values changed so much? Mostly because of increased vacancies and increased cap rates. When it comes to the science of appraisal those two numbers have a powerful impact on value. All else being equal - a small increase in the vacancy rate and a small increase in market cap rates will create a significant decrease in value.

Commercial RE Prices Continue to Slip; Down over 20 percent from 2008

Based on the Moody's/REAL Commercial Property Price Index prices of commercial real estate are down 21.2 percent from a year earlier and down 17.9 percent from two years ago. The Index, which is based on repeat sales of the same properties across the U.S. at different times, fell 0.6 percent in February to 150.63 from 151.58 in January.

The index is a good measure of where commercial property prices are going. The largest year over year price drop (February 2009 vs. February 2008) was reported in industrial, with a 13.9 percent decrease; followed by apartments, with a 13.6 percent decrease; office, with a 13.5 percent decrease; and retail, with a 8.5 percent decrease. Also, according to the report, sales volumes in February were down 67 percent from the year ago period and most of the sales (90 percent) were for assets under $15 million.

According to Zack's Investment research, these trends indicate there might be many owners who bought at the height of the boom underwater on their mortgages and that there could be a rise in defaults, due to the risk that such "underwater" owners possess.

With financing still scarce and fundamentals going south, prices are likely to continue falling, which could mean fewer transactions as owners are reluctant to take losses. However, lower dollar deals are getting done vs. large transactions; financing for smaller properties is easier, which should make price drops in the >$15 million class less severe, according to Zack's.

Hopefully you have found this information useful. Let me know what you think.

For anyof your Commercial Real Estate needs in the Greater Akron, Ohio area including the Ohio counties of Summit, Stark, Portage, Medina, and Wayne, please get in touch with me.

NAI Cummins Real Estate (330) 535-2661 x 142 or by email MarkStacy@NAICummins.com

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