Spencer Levy, senior managing director of the eastern division at CBRE Capital Markets, said that uncertain valuations complicate distressed-asset deals because participants find it difficult to forecast tenancy and discount rates necessary for tenants to occupy space. His comments came at the Feb. 5 Mortgage Bankers Association's Commercial Real Estate Finance/Multifamily Housing Convention and Expo.
Levy added that valuing vacancy and land for distressed assets is also challenging in the current market, and paying taxes and condo fees to sell a unit will deter buyers from a value-add component on a distressed-asset deal, MBA Newslink reported.
Levy said that the distressed category is seeing a fairly sizeable bid-ask spread. “Most of the distressed deals that we are seeing priced are being priced for pound. They are priced based on a fraction of the replacement cost because that is one of the few objectives that people value on,” Levy told MBA Newslink.
While appraisal comparables are the best value indicator, fewer transactions prevent appraisers from using them and, ultimately, a traditional discount rate derives from new income for the property and when that new income will happen, according to MBA Newslink.
While fewer sales in the marketplace may make the valuation process more difficult, highly qualified appraisers are trained in techniques to help in those situations. Such techniques are taught in the Appraisal Institute seminar, Appraising Distressed Commercial Real Estate: Here We Go Again, information on which is available at www.appraisalinstitute.org/education/seminar_descrb/Default.aspx?sem_nbr=809&key_type=S . .
With more than $100 billion of purchasing power waiting for distressed assets, Levy said distressed assets still trade below where many banks and special servicers would like it to trade. “The end of deals in the major markets tends to have this tremendous value-add component to it, and that is where the bid-ask spreads still exist,” Levy told MBA Newslink.