Appraisal's Crunch Time

In a normally functioning commercial real estate (CRE) market, appraisers mediate unbiased information about the market between buyers, sellers and lenders. But shifting work and social patterns following the COVID pandemic coupled with the dramatic decline in real estate transactions over the past year have made the job of appraisers simultaneously more challenging yet more important than ever. 

Today’s letter will explore how commercial appraisers are responding and adapting to a market facing extreme levels of uncertainty, as well as:

• How appraisal firms are adapting to low transactions volumes
• How banks are handling this real estate cycle
• The pros- and cons- of real estate data proliferation
• Will AI replace human appraisal?
• The evolving role of appraisers

When investment manager Pimco bought office REIT Columbia Property Trust, it did so using $1.7 billion of CMBS debt. Structured financing tools like Commercial Mortgage Backed Securities (CMBS) split loans into tranches of varying risk which are then sold off piecemeal to investors. In distressed situations, CMBS financing means appraisals can be the difference between gaining control of the real estate and losing one’s investment entirely. 

Howard Marks’ Oaktree held the riskiest tranche of the Pimco debt. The terms of the CMBS securities meant that Oaktree would get control of the assets provided they were worth at least the original $1.7 billion–but an appraisal in June of last year put the value of the portfolio at $1.6 billion. Per The Real Deal, “Oaktree, however, challenged that valuation and put forth a new one — $1.8 billion. The servicer overseeing the loan plans to accept that figure, putting Oaktree back in control of what’s shaping up to be one of CRE’s biggest power struggles.”