Our assignments this quarter have taken us across Minnesota, North Dakota, Wisconsin and Montana and have included everything from conventional retail, office, industrial and multifamily properties to senior housing, litigation, tax increment financing incentives and specialized properties.
One of the questions we hear most often is:
“How is the commercial real estate market doing?”
Our answer continues to be:
It depends.
Here are three observations from our recent appraisal work that we think are worth sharing.
1. Occupancy doesn’t always tell the whole story.
We’ve encountered remarkably different conditions among recent retail, office and mixed-use assignments.
One recent small-market North Dakota retail property was 100% occupied with strong occupancy history, demonstrating that well-located properties with established tenants can continue to perform well even in smaller communities.
Other assignments have presented the opposite situation: vacant or month-to-month space where today’s income isn’t necessarily representative of what a buyer would underwrite.
In those situations, the more important question is:
What would a buyer expect this property to produce after stabilization and what will it cost to get there?
That means considering market rent, downtime, tenant improvements, leasing commissions, concessions and carrying costs, not simply capitalizing the income being collected today.
For owners and lenders, in-place occupancy and stabilized occupancy are not necessarily the same thing.
2. There isn’t one commercial real estate market.
Our recent work continues to reinforce how cautious we need to be with broad statements about “the commercial real estate market.”
A neighborhood retail property with durable tenancy can behave very differently from a partially vacant office property. A specialized recreational or institutional property may have few directly comparable transaction evidence that replacement cost and depreciation become major valuation considerations.
Even within a single property type, location matters.
Our work now regularly takes us across Minnesota, North Dakota, Wisconsin and Montana. The depth of the buyer pool, available financing, rent levels, development activity and availability of comparable transactions can vary considerably between a major metropolitan area and a smaller regional market.
That is why we remain cautious about applying national commercial real estate narratives too broadly.
Commercial real estate isn’t one market. It’s a collection of individual markets.
3. Not all property income is real estate income.
This quarter also brought several assignments involving properties where the distinction between real estate value and going-concern value became particularly important.
One example involved multiple Minnesota senior-housing properties appraised for property tax appeal purposes.
Residents of an assisted-living property aren’t simply paying rent for an apartment. They may also be paying for services, management and an operating platform. Depending on the property, income may also compensate furniture, fixtures and equipment, licenses, workforce, goodwill or other business components.
That creates an important appraisal question:
How much of the income is actually attributable to the real estate?
We’ve encountered the same issue while evaluating other operating properties. It can arise with hotels, restaurants, and other operating properties.
Capitalizing all of the income generated at a property does not necessarily produce the value of the real estate.
Before valuing the income, we first need to understand what generated it. When appraising the real estate only component, it’s important to properly allocate the revenue attributable to the real estate and the going concern components.
At Simonson Appraisals, our work across different property types and markets continues to reinforce the importance of looking beyond the headline numbers and understanding the factors that actually influence how market participants view a property.
Because when someone asks us:
“How is the commercial real estate market doing?”
The answer really does depend.
Mitchell Simonson, MAI
Owner, Simonson Appraisals
📞 612-618-3726 | ✉️ mitch@simonsonap.com | 🌐 www.simonsonappraisals.com