Around this time last year, the U.S. commercial real estate market was recovering from one of its worst periods during the global pandemic.
Work resumed on many existing or planned building projects that were paused because of the pandemic. Low interest rates, a high level of employment, and strong demand for certain commercial real estate properties helped propel a favorable environment for projects, though rising material prices and a continued construction labor shortage somewhat tempered building activity.
Head winds, in the form of interest-rate hikes and economic uncertainty, have affected the rebounding commercial real estate market in 2023. Many players have become more judicious in selecting projects to pursue.
The U.S. inflation rate cooled slightly in October at 7.7 percent, the lowest since January 2022, from 8.2 percent in the prior month. Meanwhile, interest-rates have steadily risen after trending at near zero percent for more than two years during the pandemic.
Property Valuations Sought Sooner
As a result of the current economic climate, owners, investors and accounting firms want to scrutinize property valuation data sooner for year-end planning purposes.
At BBG, we saw a significant uptick in client valuations requests during late summer for their year-end financial reports. In the past, those requests were typically made in October or November.
The push for valuations is primarily connected to concerns that real estate assets may lose value due to weaker economic conditions. The rate of real estate acquisitions also has slowed amid higher costs in financing deals.
BBG anticipates that more valuations of commercial properties will reflect re-pricing of deals this year and next, based on projections of further Fed interest-rate tightening in its battle to curb inflation. We also expect this will result in greater demand for valuations for property tax appeals and an increase in the use of cost segregation to improved cash flows under pressure.
In response to market adjustments, BBG’s Advisory Services has added more support and in-depth analysis of local economic conditions to its valuation reports to ensure clients receive the most accurate, timely and comprehensive property valuations.
BBG Advisory Services offers solutions and strategies for those clients who require specialized valuations to meet operational and business reporting requirements. Types of clients include open- and closed-end real estate funds, pension funds, hospitality and leisure companies, and corporate real estate companies.
BBG Advisory Services also provides cost segregation studies for clients’ tax reporting. Cost segregation is a study used to increase near term cash flow by accelerating depreciation on commercial and multifamily real estate. This allows those who have built, purchased or renovated real estate to increase cash flow by accelerating depreciation deductions and deferring income taxes. This helps companies and individuals to make investments in properties while reducing their tax obligation.
The firm offers a thorough cost segregation analysis that shows both optimistic and conservative scenarios for property ownership. This report provides owners with a strategy to increase substantial cash flow over the first five years of an acquisition.
In these uncertain economic times, BBG’s conflict-free expertise in real estate valuations and related services can help clients develop and implement effective strategies to meet their specific needs in commercial real estate matters.
For more details, contact:
Louis Yorey, MAI, MRICS
BBG Senior Managing Director and Advisory Practice Leader