Real Estate Appraisal
Real Estate Appraisal Profession
Role of the Appraiser
The role of the real estate appraiser is to interpret market data, and then to develop an opinion of value of the subject property based on the data. An appraiser's opinion is just that: an opinion of what the property is worth. The opinion of value does not always guarantee the property transfers in the market for the appraiser's value opinion, and different appraisers may have differing opinions of value involving the same property. It is important to note that an appraiser's opinion differs from the price of a property, even though both may be the same dollar amount, since price becomes a fact upon the sale of a property, whereas an opinion of value is an estimate.
The real estate appraiser must utilize a high level of analytic skill in determining an opinion of value. Today, many automated valuation models (AVMs) have appeared on the scene, but none can yet truly replace the role of an appraiser (since an AVM cannot physically see a property or neighborhood). It's important to note that unlike AVMs, real estate appraisers must verify information such as size, number of bedrooms, finished space, recent repairs/renovations, etc. regarding the subject property and the comparables utilized. It is also important to note that AVMs work best for properties that closely resemble one another in the same neighborhood.
Education and Designations
State License Process
In the State of Wisconsin, there are three levels of appraiser certification: Licensed Appraiser, Certified Residential Appraiser, and Certified General Appraiser. Each license level requires a progressively higher level of education and harder examination, to obtain licensure. For example, the education requirement for a Licensed Appraiser is 150 hours of approved courses, while the education requirement for a Certified Residential Appraiser and Certified General Appraiser license requires 200 hours and 300 hours of approved course work, respectively.
Designations
The appraisal profession has many designations that an appraiser can obtain, including the following: MAI, SRA, RAA, GAA, MFRICS, ASA. Right of way appraisers can obtain the RWA, RWP, and SR/WA designations, issued by the International Right of Way Association (IRWA). Organizations that issue these designations require an appraiser to demonstrate expertise in the appraisal profession, as well as require a certain number of minimum experience hours. Obtaining designation from any of these organizations is challenging and oftentimes takes years to obtain.
Three Approaches to Value
A real estate appraiser determines the value of a given piece of commercial real estate utilizing the following three approaches: cost approach, sales comparison approach, and income approach. The appraiser determines which approach(es) is/are most relevant and appropriate in the valuation.
Cost Approach
The cost approach is generally most appropriate for new(er) construction, special-purpose properties, unique properties, and properties where there are little-to-no comparable sales or rentals in the market area. The cost approach consists of two parts: the value of the underlying land plus the depreciated value of the building and site improvement(s).
Sales Comparison Approach
In the sales comparison approach, or sales approach, the value is estimated through an analysis of recent sales of comparable real property. Similar properties that have recently sold or are offered for sale in the market area are analyzed and compared with the property being appraised, with adjustments being made for differences in such factors as interest conveyed, cash equivalency, time of sale, location, type, and condition of the improvements, and prospective use. This approach is typically the most widely accepted for the valuation of land and existing improved properties where sufficient market data is available.
Income Approach
In the income capitalization approach, value is developed on the basis of capitalization of the net earnings that would be generated if a specific stream of income can be attributed to an asset or a group of assets. This approach is most applicable to investment and general-use properties where there is an established and identifiable rental market.
Real Estate Property Classes
Investment commercial real estate can generally be grouped in to three-to-five seperate classes. These classes represent a subjective quality rating of buildings which indicates the competitive ability of each building to attract similar types of tenants. A combination of factors, including rent, building finishes, system standards and efficiency, building amenities, location/accessibility and market perception are used as relative measures.
It is important to understand that each property class represents a different level of risk and reward, and that each class has a corresponding level of stability, capital appreciation (or not) and expected cash flows. Class A properties are generally better investments for capital preservation, while Class B and Class C properties generally have higher cash-flow and are generally more optimal for value-add opportunities.
Below are the definitions of the three different asset classes, as defined by the Building Owners and Managers Association International (BOMA).
Class A Real Estate
Most prestigious buildings competing for premier users with rents in the above-average for the area. Buildings have high quality standard finishes, state of the art systems, exceptional accessibility and a definite market presence.
Class B Real Estate
Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair-to-good for the area and systems are adequate, but the building does not compete with Class A at the same price.
Class C Real Estate
Buildings competing for tenants requiring functional space at rents below the average for the area.
Class D & Class F Real Estate
These two property classes are not defined by BOMA; however, Class D/F properties are generally considered to be properties located in non-prime locations and that contain a significant amount of deferred maintenance (property is in disrepair).
About ValCore Appraisal
Valuation Services
ValCore Appraisal proudly serves the Kenosha-Racine, Madison, and Milwaukee-Waukesha Metro areas. Our commercial services include independent commercial property valuation and consulting services (such as providing feasibility studies, market rent studies, and highest and best use analysis),and advising clients on real estate investment decisions (such as buy/sell/hold, and lease/own alternatives).
MAI Commercial Appraisals
ValCore is managed by a commercial appraiser who holds an MAI designation and SRA designation awarded by the Appraisal Institute. The designation signifies the highest level of experience in the valuation and evaluation of commercial, industrial, office, retail, residential, and other types of properties. Our clients benefit from our knowledge base of Southern Wisconsin Commercial Real Estate Market.
Helpful Appraisal Resources
Emerging Property Types
The commercial industry is constantly evolving. Advances in technology trickles to advances in real estate. Emerging property types in the commercial real estate area include multi-story warehouses, co-working office space, data centers, and micro-unit apartment buildings. Property types that are decreasing in demand include non-prime regional malls, call centers, and on-prime main street-style retail buildings.
Foxconn in Wisconsin
Background
On July 26, 2017, Foxconn, a global high-tech manufacturer, announced that they plan to invest $10 billion by 2020/21 to build a world-class manufacturing campus in Mount Pleasant, Wisconsin. The proposed campus is locate in an area bounded by Interstate 94 on the west, Highway KR on the south, Highway H to the east, and Braun Rd and Durand Avenue to the north.
US President Donald Trump attended Foxconn’s (second) groundbreaking ceremony, which occurred on June 28, 2018. Construction is already underway on the Wisconsin Valley Science and Tech Park, which is defined as Phase 1 of Area 1, of the development. This area will house Foxconn’s advanced display manufacturing buildings.
Foxconn is placing a “Wisconsin First” in both workforce and business. The companies overseeing the construction and development include Hammes Company as lead master planning partner, Gilbane and M +W Group (joint venture) as general contractor / construction manager, CH2M Cos as main architectural and engineering services, and The Sigma Group as the main environmental consultant.
Construction of this development, dubbed “Wisconn Valley Tech Park,” is anticipated to take four to six years to complete. In the process, Foxconn anticipates that 10,000 direct construction jobs will be added to the economy per year, as a result of this development. Once completed, the campus is projected to have about 20 million square feet of building space. The campus is expected to be completed in 2021.
Implications
Racine County has experienced the largest drop in county unemployment rate over the past year, largely due to the Foxconn project. As of August 2018, Racine County had an unemployment rate of 4.0%, according to the Federal Reserve. Additionally, the Federal Reserve reported a Racine County unemployment rate of 3.1% as of November 2018.
The “Foxconn Effect” is spurring many real estate developments near the Foxconn site, including hotels, business parks, retail centers, and multi-family apartments. This “effect” can also be seen in residential housing, as single-family home prices in the surrounding communities have seen in uptick in sale prices, which had been mostly flat for years prior to the Foxconn announcement.