As I  was reading the WSJ article of yesterday (1/11/2012) , “Trouble is Brewing for Office Market”. The article is authored by Craig Karmin and Eliot Brown and digs into the current state of the office marketplace.

In all reality, I  thought that because only a small amount of office space was added during the “Bubble” that the office sector  would escape unscathed.

But, not so fast..two things are at the root of the problem,

1. Contraction of firms occupying office space

2. Many mid-market and large buildings took advantage of low rates and easy money (just like many homeowners).

The result is easy to see..with tenants able to demand concessions and renegotiation, which then leaves the properties “upside down”.

This  additional debt and a limited prospect of near term change is the result!

In regard to the Tampa and St. Petersburg, Florida office market- CoStar reports 4th quarter 2011 vacancy of 13.6% over all classes of building, indicating that for the moment the office market is not oversupplied.

Thanks for the quick read, I hope that it offered a bit of insight for you as to where the Commercial Office Real Estate Sector is, and how it’s demise has let to our current status.

Robert Dunham, MAI, SRA

The role of a Real Estate Market Analyst in litigation support goes far beyond providing just an appraisal of market value. All appraisers are not alike, and each appraisal should begin with a basis in “Market Analysis” as we seek to understand not just what the value may be but why, for how long and under what circumstances.

The key is in the fact that before there can be any market value there must first be established a supportable highest and best use based on a foundation of sound market analysis.

Providing the underpinning of market analysis is critical, and failure to do so is not an option!

This market analysis process whether informal or more structured must provide as a conclusion in the determination of highest and best, the USE, THE USERS and TIMING. The quality of valuation without these answers is questionable.

How a qualified Expert Testimony Witness can add value to your case.

There are many talented appraisers in the market, but only a few are truly effective in providing expert testimony.

A thoroughly supported appraisal and market analysis and the skill and professional demeanor necessary to defend it in testimony and withstand the inevitable cross examination is necessary when choosing your expert testimony witness.

While there is no client bias allowed, the appraiser, acting as an expert witness can be a persuasive advocate for his/her appraisal and value. Most testimony falls upon the ears of a marginally interested audience. Imagine the strength of a case built on market value when the value, facts and conclusions are powerfully presented.

Litigation Support- When you need it and Why

This is a broad category but largely revolves around preparation and support for not only your expert’s appraisal, but also an in-depth examination of the opposing expert’s report.

The expert can provide questions for you based on a careful critique that will enable you to provide effective direct testimony and cross examination. Two experts likely disagree not only on value but the support for their estimates, therefore credibility is the issue.

The appraiser may also function as a methodology expert examining and if needed, provide testimony that focuses on the credibility of each expert.

The true ability of a Real Estate Market Analyst comes in determining the problem, seeking the solution and providing the plan. It is the goal of Valupoint Valuation Counseling to provide real estate market intelligence for true decision makers as their needs arise.

Thanks for reading my blog, and if you have any questions or comments, I always welcome them!

via Wikipedia

In the world of commercial real estate today, it is my opinion that reports of the patient’s recovery are highly exaggerated. In fact,  it is clear to me that there is still a logjam at the nexus of banks, the FDIC and the markets.

For nearly two years I have been sure that the cycle of this real estate bust would emulate past down cycles that I have observed over the last 35 years in Florida.

• Just like when Mr. Twain notably quipped that “Reports of his death were highly exaggerated when he saw his obituary in the newspapes,” the media today is sending the general public the wrong messages.

We already had a great model employed in the wake of massive bank failures first in Texas and then in New England after the Fed overreacted and collapsed the Bank of New England. The model grew out of a specially created quasi- government agency known as FADA (Federal Asset Disposition Agency) and evolved into the (Resolution Trust Corporation).

The upshot is the creation of a “good bank”-“bad bank” relationship where toxic assets were separated from performing loans on commercial real estate.

Had this model been put in place years ago, the market and economy would likely be much further down the road to recovery,  instead of the state of inaction we have now.

• The result will be necessarily painful, there will be more foreclosures, more deficiency balance suits, more bankruptcies and inevitably more trouble for banks in the near term.

Once the medicine is taken, the “patient” will recover!

Cover of Mark Twain

At some point we all have come to that question! We wonder when there will be something positive to feel good about when it comes to both the housing markets and the commercial real estate markets.

In spite of the current situation we as a country find ourselves in, that is a massive traffic jam of uncertainties, there is hope. The following facts are reason for optimism, though the timing is yet to be determined.

1. We must get through the election year theatrics and promises before investors of all kinds in all types of markets have a firm idea of how risky their actions may be. Taxes, unemployment, regulation and availability of capital will become more clear in 2012-2013. Until the politics are processed and decisions made there is little likely to happen, but happen, it surely will.

2. The various property types over most geographic areas are changing even now as the painful but necessary revaluation of assets adjusting to the simple yet eternal truth that when markets are left alone, they will sort out the problems and at some point, the reset button is pressed.

3. A colleague of mine in the valuation business relayed to me last week during a shared moment at a seminar break that “there are cranes in the sky again in Miami”. This has happened because the various segments of demand have started to be sorted out and will absorb enough inventory of CRE and condos to eventually signal tangible optimism in the form of “new” building. Remember that the Greater Miami-S. Florida economy is very different than most other areas, but any news is good news at this point. (See link included)

As disturbing as the fall of the R/E markets has been it is clear that prices may be near the bottom and when that point is reached markets will move agin in the other direction after stabilization. No question that each market area is different as the problems in some areas are greater than others, but that just means that the process will take a little longer. Remember there is no ONE real estate market, there are many markets and submarkets and most are uniquely sensitive to employment, household income and population growth.

We should pay attention to the market segments already in recovery and those whose problems are less overwhelming than others and take good cheer that like most things, “Time heals all wounds” as it relates to real estate market suffering and pain.

I’m reminded of the wonderful quote, “Try again. Fail again. Fail better. “- Samuel Beckett, as I attempt to finally learn to standup on my new stand up paddle board. So far it’s more of a “Kneel Down” paddle board, but I know I will succeed if I remember and embrace Beckett’s words!

As I have progressed I have also been following my favorite “project that maybe shouldn’t have been built”, Baywalk, in downtown St. Petersburg, FL. Recently after a number of flirtations the St. Petersburg Times reports that a new buyer is making an offer for the ill-fated and often failed hybrid retail project. While the development of the project precedes the recent “Bubble-Boom-Bust” it failed and tried again so many times the only conclusion is that the project and the owners had an “identity crisis”. There are ten things the new buyer should know or think about before purchasing to “try again”, or the project may only fail better.

1. Define what the development is. It’s clearly not a conventional shopping center and when compared to other successful similar projects it is not even a good “festival marketplace”.
2. Don’t buy it just because it appears to be a “good buy”. How can you know that without knowing what it is, who will use it and what the users are looking for, and what it will cost to make it viable.
3. Determine what the new client requirements are and what it will cost to make that happen.
4. Estimate how long it will take to find new tenants, the cost of attracting them, and what will they pay in rent.
5. Don’t assume that the location is as good as nearby Beach Drive competitors, the use may be different and they may not be a true measure of your possible success or even competitive.
6. How will you deal with the stigma of an oft failed project?
7. Get a thoroughly researched, independent and unbiased market study that addresses the issues raised here.
8. Don’t rely on a marketing expert at this point until you know what will be marketed.
9. Don’t assume that you have a better idea than anyone else until you gather all of the information necessary to support that.
10. Consider that  accomplishing the above objectives may indicate that the cost of striving for success is greater than the price to be paid now with little if any upside
11. The highest and best use may be to raze the site and try again.

It’s good to remember the quote “To everything there is a season, and a time to every purpose under the heaven”, while the verses in Ecclesiastes may not have been talking about real estate and highest and best use intentionally, the truth it contains is useful to consider.

Image via Wikipedia

This wise appraisal corollary never seemed any more true for me as when I went to Ft. Lauderdale recently to testify as an expert witness in appraisal technique and highest and best use.

This was a hearing before a judge involving my client and the plaintiff, a well-known regional bank, to rule on a judgment for payment of a deficiency balance resulting from a forced foreclosure on the property formerly belonging to my client. To add an interesting twist, the action deals with a retrospective date of value challenging the experts to wind back the clock 3 years.

The problem clearly reinforces the basic premise of market value (no matter what the date of value). Few actually recognize that as real estate appraisers we actually appraise the “Use” not the property. Picture a pyramid, with the top layer at the point being “market value”, the middle layer, the highest and best use conclusions and the base providing the underlying support and foundation is a thorough market analysis of the actual or proposed use. All three are essential to providing the basis for an appraisal of market value.

Every real estate appraisal is a highest and best use puzzle, requiring the appraiser to locate and place together the pieces necessary to solve the riddle. There are a few simple rules that must be adhered to, the more stable and likely unchanging the recent market for the property use under analysis, the less a formal market analysis is necessary.

It follows then, that the more volatile the market conditions with a high degree of uncertainty implicit, the more complex the market analysis must be. In addition if the use and property indicate a small, less complex problem, the more likely that only a basic, referred to as “Inferred Market Analysis” is required to support the use, users and estimate of market timing.

The Ft. Lauderdale property and use as of the date of value, was a part of a wildly uncertain market and proposed to be developed with a complicated concept and specialty improvements. In fact, the use was preliminarily approved for this unusual development as a “Mega-Yacht”, “dock-o-minium”. By the client’s definition, a mega-yacht would be greater than 100 feet in length and of course cost millions of dollars. So you can’t help but ask yourself, “how many of these yachts can there be, and why choose Ft. Lauderdale?”

It turns out that Ft. Lauderdale is generally acknowledged to be the boating capital of the U.S. and very possibly the world. Even here there are few sites able to support such a facility and little if any competition. And worth mentioning, 10 of 26 covered slips were bought with at risk deposits.

• Four appraisals in total were completed, the first (which was subsequently updated) correctly and properly analyzed the market for this use and the appraiser believed that mega-yacht use to be the “highest and best use”.
• A second appraiser concurred and performed an even more well supported market analysis.
•  The bank then ordered another appraisal after the foreclosure and suit had been filed. This appraiser unfortunately did not perform an adequate market analysis and therefore arrived at an entirely different highest and best use conclusion. This use was then valued at roughly one-half the conclusions proffered by the first two appraisers.
• The client then ordered the fourth appraisal during the post foreclosure process and this appraiser supported the first two and within a similar value range.

Please don’t jump to the conclusion that just because three appraisers of four agreed, that the fourth is wrong.

The value estimate is only the result of the proper attention to market analysis to support or in this case, provide support that the proposed and approved use of the property, which then suggests using only the necessary market data that relates to the use conclusion.

There is strong evidence to suggest that three appraisals because of their very complete market analysis supporting the mega-yacht dock-o-minium are more credible than the appraisal with virtually no market analysis provided other than anecdotal interviews. Therefore, the corollary applies “If the highest and use is wrong, the value cannot be right”.

If you’d enjoy discussing this further, please leave a comment below- I’d enjoy conversing with you.

Concurrently with the near total deterioration of the Florida real estate market encompassing most segments and categories, comes the push back against county property appraisers about their valuations and the resultant tax liability. Amidst loud and steady cries for reform the Florida legislature has recently considered several key issues that relate directly to property valuation.

There has been much made of the County Appraisers employing “highest and best use” as the basis for valuation for tax purposes. This resulted in cases such as “working waterfront” properties that argue that not every parcel is a site for a waterfront condominium and that the present less “valuable” use should apply. Many have rallied behind the idea including another group severely affected by the run-up in prices, the small motel and hotel properties which are often family owned and marginally profitable before any potential tax burden.

It is tempting and emotionally appealing to consider this change in the law but in principle, it is the wrong thing. We must drill deeper to unearth the root problem and consider how there may be other potential remedies. There are four classic tests of highest and best use that must be considered and while each is important they require total consideration to arrive at an informed decision.

• The proposed use must be legally permissible
• The proposed use must be physically possible
• The proposed use must be financially feasible
• The proposed use must be maximally productive.

The classic (and only partially true) statement often heard is “that use which results in the highest net return to the land”. It is a highest and best use as if vacant concept which is then considered in terms of the highest and best use as currently improved. The contemporary statement which most applies to the definition is “that use which results in the highest net return to the land in consideration of USE, USERS and TIMING (risk).” It is more than a subtle difference and one which is widely ignored by fee appraisers and county appraisers who fail to consider properly all of the four tests which in turn are supported by market analysis which is the “plasma” that sustains the organism.

Here are some examples based on recent cases with location and some details purposely omitted. In a local incorporated island community all land parcels west of the single service arterial are zoned for commercial use which among its permitted uses allows condominiums under certain physical guidelines. In this community are a number of locally owned or seasonal beach cottages much like the scenes I remember growing up in Sarasota. The lots are small and in many cases substandard in size allowing only conditional rebuilding if the structures are destroyed or severely damaged by an act of God. The property appraiser holds the view that since the land is zoned for commercial use now, even if the site is not large enough to support a multi-family structure, it may be combined with either contiguous parcels or worse, non-contiguous parcels to create a condo site.

This is an extraordinary set of assumptions under any conditions but in light of recent, current and likely continuing conditions the act strains credulity! First “assemblage” of land and/or improved parcels with attendant price influences is not a properly supported highest and best use. The only reason to assemble is when there is a market for the product that will ultimately be placed on the assembled site. This is such a key issue and it cannot be underscored enough, it’s about the TIMING requirement we discussed earlier.

The property appraiser used some sales of small residential properties that were “flips” and others where the implicit assumption on the appraiser’s part was that they were potential condo sites. More to the point at the time of the valuation there were (and more now) hundreds of unsold condominiums and even available vacant sites. Why would there be a market for the land when there is clearly no present market for the condos? This is the point where the issues become timing and risk as there needs to be a forecast of when there will be a market for the potential development and as always timing and risk are intertwined. The longer the holding period required to build the more risk that the outcome may not be as planned. Simply, the present worth of assumed future benefits.

The second example is similar in that as before, it’s a highest and best use problem (but then all of them are!). There is a slice of time in a rapidly escalating residential market, especially at the beginning stages, where there is unsatisfied demand because supply to match demand takes time, there is a lag. In that interim period there are “low hanging fruit” in the form of rental apartment projects that may for a time have a highest and best use as converted condos where they can be sold quickly. In my experience this has happened every time there has been a market surge and every time there have been unintended consequences. When the supply side catches up to current demand there exists a significant product differentiation. If you are a “user” or intended resident there may be better products with more features that are newer. If you are an investor there may be nobody to flip the speculative purchase to. If all sales are not consummated and closed there is the danger of becoming “fractured”, partly sold, partly not and among those two, partly rented.

In this case the appraiser has a “loophole”, once an apartment project is “declared” as a condominium the assessor in the next cycle can assess each unit separately as a “condo” unit. Let’s consider the aforementioned four tests; the use may certainly be legally permissible and physically possible (as improved) since it is basically the same as a rental project. There is just an aggregate change of ownership. The real problem is when the market never materializes or just disappears mid-stream! It is very likely in the case of a project never marketed that it is operated just as before, as a rental. Logically under highest and best use tests that is the highest and best use. In the case of the fractured or partially sold project it is a bigger mess to clean up. It should be valued both as a rental and as an unsold condo with market analysis of the product, timing and supply and demand required. This will be the present worth of future benefits as well.

Highest and best use cannot be determined without appropriate market analysis and value cannot be estimated without an appropriately supported highest and best use.

The most compelling contemporary question I hear is “are we at the bottom of the market”? There is a variety of opinion about this; some driven by a “positive attitude” because we need some good news, some which are darker and perhaps more pragmatic responses. I am an admirer of Lou Dobbs of CNN, he is by in large a practical thinker strong on basic rights and a keen observer not afraid to give his opinion. He has been predicting the economy (including housing) will begin a comeback before the end of the year. He criticizes both Obama and Bush for negative messages and offering little good news. The interwoven problems and solutions to the total economic health picture are beyond most of us but clearly there are key indicators in my bailiwick that give me a cautious view of when and how there will be a substantial recovery.

First, any recovery however that is measured, will not be uniform and across the board at the same time. Second, prices (not values) will not “return to their peak” anytime soon given that the peak was investor driven and not user driven. In addition to the hopefully soon to be flowing credit availability there is a single troubling wild card that cuts across every region and every property type. It’s fundamental that jobs are the key to all of the other systems. The alarming rise in unemployment will not change overnight and in spite of assurances to the contrary may not respond positively to stimulus attempts in the near term. Think about it, jobs create income which evolves into disposable income. Without adequate ability to repay from income there can be no housing mortgages, retail space becomes vacant (save for necessities) and office space exhibits shrinking occupancy.

I tend to agree with St. Pete Times columnist James Thorner in his May 1st column, “Rah-rah housing talk is wishful”. He provides an estimate that there are 35,000 unsold homes which for some period of time will be fed by further foreclosures. We in the Tampa Bay area and most of coastal Florida have been dependent upon in-migration of retirees and relocation of families coming primarily from the Midwest and Northeast. If that migration pattern is to continue (and there are signs that is dramatically changing) those folks need to sell their homes “up north” first. Almost every day the optimists (and some with rose colored glasses) point to the increase in home sales which has closely followed the slow to change price declines. It appears that there are certainly bargains, especially if you intend to live in what you purchase, but once again there are pockets of equity rich investors counting on the market being at or near the bottom in prices and are preparing for a renewal of flipping. However, once again the fundamental lack of credit and mortgages for many precludes fueling the cycle and at the end of the day it’s still about jobs, especially if you don’t have one!

This past week was as usual packed with tidbits of information and continued hand wringing about TARP, foreclosure and other serious subjects. What I found more interesting was closer to home. In the St. Petersburg Times on Sunday there were two references to proposed real estate projects. One is the massive Babcock Ranch development proposed for southern Charlotte County to the east and south of Punta Gorda. Former NFL player Syd Kitson and partners purchased the 90,000 acre ranch in 2006 at what now seems the peak of the overheated market in SW Florida. After closing the group then spun off 73,000 acres to the State of Florida leaving the remaining 17,000 acres for future development of both residential and commercial development. The article acknowedges that Kitson and his associates are clear that this is the riskiest venture they have undertaken to date. Mr. Kitson’s group has formed an alliance with Florida Power & Light for a sustainable solar community. The group feels that this is “the game changer” the group is counting on it to make the project a success.

As an appraiser and market analyst the project of course intrigues me on several levels. I have recently worked on assignments in Lee County to the south of the acreage and it is widely thought there are tens of thousands of unsold lots and homes with ground zero being the long enduring Lehigh Acres east of Ft. Myers. The first thing that must happen is that an overwhelming excess supply of both lots and homes must be absorbed in order to provide any opportunity for a new project. I do not, nor does anyone else know exactly how much time that will take or if the worst is over and the bottom reached.

I agree the energy efficiency aspect is an intruiging one as Floridians watch their cost of living soar at a time when joblessness is rising and many cannot sell their homes. The recognition that addressing the critical issues of energy cost and water is long overdue and may well eventually even provide a marketing advantage over other opportunities. What bothers me is the optimisim that the developers apparently feel that things will go back to where they were before the downturn, that just as many people will retire and migrate to Florida as ever. There is already documented study that suggests that while in-migration is positive a substantial number of households are leaving. There are many reasons that this was happening even before the resounding economic upheavals of the last 9-12 months, primary among these is the reality that the quality of Florida living “ain’t what it used to be”.

At the end of the day as they say, it is a gamble to acquire and hold the land and likely incredibly expensive to create infrastructure even without the consideration of a fully solar community. It is possible that the ability to hold on to “Boardwalk” and “Park Place” can provide a tremendous upside but substantial market analysis and due diligence is required to support that confidence.

 In the case of downtown St. Pete, I was wondering what the pilings being pounded along 1st Avenue South were for? This represents the foundation building step of a project located at 1560 Central Avenue which will when complete function as a market rate rental aprtment project of 300+ units. The location places the project due north of Tropicana field and as a neighbor of the nearby sports bar. I would assume that the project demand forecast was based upon a very thorough market study and if so I would love to see it. As a market analyst and appraiser for 35 years I have heard most of the stories, plans and dreams that precede the development of a project, I am a natural skeptic of hype and a practical believer in sound market data and indicators.

The compelling question is why now and why rental apartments at market rate? There are a few related threads of reason that warrant further discussion. During the early stages of the recent burst-bubble there were a number of conventional rental projects converted to condos throughout the Tampa Bay area and Florida. It is the “low hanging fruit” available for a short window of opportunity while the supply side struggles to catch up with demand. Like fruit, the opportunity is highly perishable with a short shelf life. The aftermath of the conversions produced a predictable result, the successful conversions went up and out quickly but as of this writing there are thousands of units in hundreds of projects all over the state that are now “fractured” (part condos sold-part rental units). Many units were purchased as “investments” to be rented and some amount by the former apartment tenants. The ownership structure changed but the market metrics indicate that the fractured projects are still rental competition. Add to that the the “shadow market” of built but not fully sold or occupied condominiums dotting the landscape from I-175 to 1-375 and from 34th Street to Tampa Bay.

So first “supply” must be absorbed through sales or full rental occupancy which has been and will continue to be slow for a year or two and possibly more. Secondly, the recent condominium developments were not based on any definable demand but on the “Field of dreams” theory, “if you build it they will come”; they didn’t, at least in sufficient numbers. In any community there is a dynamic ratio between the propensity of household occupants to rent or buy; the typical range is from 30-60% rental and of course has results rooted in jobs and household income, both of which are currently in trouble. This project should come to market in 2010 and we will just have to wait and see if the location and the product ignites a lateral move as high density Pinellas is nearly at capacity without demolition and replacement. I just wonder, “Is now the right time” and is this the right place?

In a time of increasing frustration and turmoil the Tampa Bay area real estate market offers few clues to incite an outbreak of hope (with confidence). In fact, in addition to the ongoing residential slide other analysts believe that the commercial real estate market has yet to suffer a similar fate. There is some good news, I feel that the commercial market is not overbuilt in every property type as there were not that many new starts of office buildings and industrial (broad category of industrial) buildings. This is consistent with what we call demand generators; for office space and industrial space the demand for new space is directly related to job growth in the relevant categories. However, retail space and residential growth are another matter entirely as the adage says “retail follows rooftops”. However there is serious overbuilding when retail leads rooftops as has been the case from 2003-2007/8. The underlying premise of one use following the other is valid as part of the reason new residential units are built and occupied is the presence or promise of retail services, especially the standard grocery store anchored neighborhood shopping center. Further exacerbating the problem is that so much of new housing stock was a false path not seen until later where flipper-investor driven demand rather than users of housing was driving supply creation. So it is not unreasonable to expect there to be a growing parade of retail failures compounded by the lingering recession and rising joblessness. In all of that bad news, the neighborhood shopping center stands the best chance of surviving because of the nature of the shopping for essential goods and services. It was already clear that there were too many malls and then too many mall killers in the ubiquitous “lifestyle centers”.

So, where is the light? Any decision made regarding commercial real estate or for that matter the residential development sector must be made on more than hope and desperation. Smart marketing always plays a role but this is more about relying on realistic timing forecasts built as solidly as possible on good market analysis study and the use of the six-steps of market analysis detailed on my websites. So much depends (and it always has) on properly defining the product at the outset and coldly assessing the competitive attributes. The product or project that most closely possesses and maximizes efficienctly  market standards will emerge sooner from these troubled times and market turmoil. It is a fact that during this crazy run-up in price superior products sold or rented first, and as always the second and third tiers followed. As the market demonstrated an appetite for more and more, the secondary location and product became a pseudo-primary property and each level in turn moved up. As the tide goes out, and gathers to return, the pecking order is reordered and “the last shall be last”. It is also important to know the competitive market area and a realistic assessment of the estimated market share. From within that market area (and it’s different for most different properties and variations) demand can be forcast and competitive supply can be counted.

It’s not complicated in concept, absorption of supply will eventually and gradually result in a renewal of reasonable demand, the burning question is when!