- Miller Samuel Real Estate Appraisers & Consultants - https://millersamuel.com -

[Commercial Grade] Time To Break Out The Ouija Board


Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC [1] and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

Remember the Ouija Board [2] you played with as a kid? It used to be so comforting to know that you could tell the future. With the local real estate market in transition, and everyone trying to understand just what the heck is going on, it may be time to break out the Ouija board again.

Our market, New York City, seems to be somewhat insulated from the woes being experienced by the rest of the country, but experts throughout the City (and the Country) seem to disagree on whether our market fundamentals are just so different from the rest of the country that we will escape the pain, or if it’s just been delayed and around the corner.

Lenders in particular seem to be scratching their heads. Over the past six months or so I’ve received a flurry of phone calls from a number of major lenders interested in retaining us for a market study so that they could, essentially, figure out if it’s safe to continue making loans in the near future.

The conversation usually goes something like this:

Lender: We’d like you to do a market study for us. What would you charge?

Me: Let’s talk about the scope of the study. What questions, specifically, do you want us to address?

Lender: We’d like to know if there’s still demand for new development and what the saturation point is. We’d like to know every project that has come on line and is in marketing, what it’s selling for, and the absorption rates. In addition to what’s currently marketing, we’d like to know every project in the pipeline. We’d like to have that broken out by condo, co-op, rental and by neighborhood.

Me: I see. You realize that there is no central database of such info. It would require all original research with the various community districts, Buildings Department, Attorney General’s office and lots of calls to brokers and developers. This is a large and very complex market and at the end of the day, I’m not sure that this data or any data is really going to answer the demand question for you. We can do the research but it’ll be very expensive and take a couple of months. (I know, I’m quite the salesman!)

Lender: (long pause) OhI have approval for $5,000.

Me: (long pause) Wellmaybe we can revise the scope somewhat

I understand wanting to get your arms around the situation, but the bottom line is that no market study or econometric analysis is going to tell a lender that it’s safe to continue building and making construction loans in this environment. I’ve seen analysts put together pages of formulae and algorithmic theorems trying to quantify demand, but there are so many variables and assumptions incorporated into these models so as to render them (in my opinion) meaningless.

Try as we might to understand the current market, it’s still anyone’s best guess as to where we are in the cycle and how much pain we’ll experience before it’s over. No examination of past performance or theoretical demand projections are going to definitively answer that for us. Back to my original question.

Anyone have a Ouija board that I can borrow?