Solving (??) Current Valuation Mysteries (??) For many, 2008 was a painful financial experience. As it relates to real estate, home prices in most cases have eroded. Commercial properties are facing huge “maturity risk exposure” (pending re-fi requirements). Lenders are trying to generate or keep cash…. and stay afloat.   One of the reasons cited for the ongoing distress in 2009 is the “valuation conundrum”. More commonly, this is expressed as “No one knows where the bottom is” or “How do we ‘price’ things now”?   Without question, current valuation is very difficult to accurately and precisely to gauge. The primary valuation tools (comparable sales and income generation) are either “frozen” (no sales) or “flawed” (who’s numbers can you believe?). Thus, how do we “value” assets in this current environment?   Professional appraisers have always used a tool often overlooked in the marketplace. Very simply, it is a cost analysis.

Recent WBJ data indicates that DC Gov’t is posting “high value assessments.”  This is timely, if for no other reason assessment notices are pending.  It is also important on another, more material level:  DC Gov’t MUST be very aware that they are rapidly approaching the edge of a cliff. If property taxes continue to increase, they run the risk of forcing DC tenants to other jurisdictions.  Already, one prime tenant , Carlyle Group, has offloaded some of its space to Rosslyn.  If Carlyle cannot afford to operate in DC, who can?  In addition to that, RCDH sees a secular trend for increasing the use of telecommuting, office hoteling, etc as occupancy costs continue to escalate.  Thus, demand for office space in DC may erode.  With pending (material) federal budget cutbacks, either rent erosion or cost-cutting are, without question, of the federal agenda. DC has done this in the past (i.e.,

Most real estate pros today are actively monitoring the current sale market, either in disbelief, or starting to think about selling into an “up” market.  At the same time, buyers are cringing from “sticker shock”.  Their hope is that there will soon be a “bursting of the pricing bubble”.  In the language of institutional investors, is the present pricing bubble “sustainable”? A review of Table 1 on aggregate sales volume over the past 5 years indicates that there is indeed a continuing sale trend in terms of total sale volume.  For each of the past 2 years, the prior year’s sale volume exceeded the earlier year by more than 50% (+63% from 2001 to 2002; and 55% form 2002 to 2003).  Prospects are that trend will continue. Table 2 indicates that the average sale price/property is (and has been) in the $60-70M category.  Only in year 200 did this average