Market Valuation of firstmidwestgroup.comfirstmidwestgroup.com

Appraisers of real estate retail inRockford IL have come in for criticism for excessive bullishness. Media commentary has fixated on the shuttering of shops, while retail-focused real estate investment trusts are priced at substantial discounts to the value of their assets. Against this backdrop, many question whether appraisers are overvaluing retail properties. But Government data on transacted assets suggests that appraisers haven’t been over-optimistic on the retail sector; and, if anything, they appear to have appraised retail assets more accurately than other property sectors — industrial real estate, in particular.

Price vs. valuation in historical context

Countering some commentators’ skepticism, assets transacted during 2018 across all sectors, including retail were sold at premia, rather than discounts, to their most recent valuations, as the exhibit below indicates. While retail had the lowest premium across the sectors in 2018, it was in line with its 20-year average, as were the office and residential sectors. Meanwhile, industrial’s weighted average premium was at a record high.

Why is there a difference between trading price and valuation?

The question of value is not as straightforward as it first appears. Most people are familiar with the phrase “something is only worth what someone is willing to pay for it.” Attributed to Publilius Syrus in the first century B.C., this notion has been around for at least a couple of thousand years. Publilius doesn’t paint the full picture, however. The marginal buyer sets the market price: the one who is most willing but also able  to pay, but even then, only if the offer is accepted by the seller. For a listed security, with thousands of buyers and sellers agreeing on prices for thousands of identical shares, there is no question about the market price of a security. Negative sentiment about market dynamics can be efficiently transmitted to pricing.

When it comes to private real estateretail in Rockford IL, however, we don’t have evidence for specific buildings only that of broadly comparable buildings. The truth is, at any point in time we don’t know what someone is willing to pay. Appraisers balance relevance and freshness of market comps in their estimation of market value.

And the result? We can’t observe bids on assets that haven’t sold or those not offered for sale, so there is no way to assess the accuracy of valuations of such properties. For assets that have traded, however, it seemed appraisers did a reasonable job with the limited evidence they had.

No one knows exactly how these changes are all going to happen or even what they will be. Like so much about retail right now, being flexible is the best strategy. The landlords who can adapt the fastest will succeed. That’s the simple but difficult truth about so much in realestate retail in Rockford IL right now.