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24 MAY 2018

Until the next bubble

The following article was written by a student volunteer who attended the RICS Summit Series Americas 2018 stop in New York.

The valuation and mitigation workshop, led by Cate Agnew, Executive Director at Natixis Corporate & Investment Banking (CIB), covered insights from leading valuation experts with different backgrounds. The speakers included Colin Johnston, President of Altus Group’s Canadian Research, Valuation and Advisory division, Eric Lewis, President of Cushman & Wakefield’s Valuation & Advisory group for the Americas Cindy Ma, Managing Director and Global Head of Houlihan Lokey’s Portfolio Valuation & Fund Advisor Services and Raymond Cirz, Senior Managing Director of Newmark Knight Frank’s Valuation & Advisory practice. Each of these experts shared an optimistic point of view on the economy and identified critical issues that need to be addressed.

Real estate trends

Colin Johnston began the discussion speaking about the industry he knows best: retail. As many know, large retail stores have lost customers to online retailers, namely Amazon.com. Landlords are left ill-equipped with extra space that sits idle. According to Johnston, the abundant vacancy in big box space is due to poor retail evaluation models.

Vacancy rates are vulnerable to the boom and bust cycles in cities that rely heavily on one major industry. Calgary and Houston, for example, are centered around the oil industry so vacancy rates mirror the rise and fall of the price of oil. Overall, commercial real estate investors have been too optimistic and should pay more attention to predictive analytics, says Johnston, looking to previous cycles for more accurate market predictions.

Eric Lewis and Cindy Ma spoke more broadly about the real estate investment market. When questioned about a possible market bubble, Lewis noted that the current recovery is lasting longer than usual due to the severity of the previous recession. The yield curve is still intact with room to run for long- and short-term rates. Lewis also noted the relationship between cap rates and 10-year treasuries is at a 10-year average.

There is a significant amount of money waiting on the sidelines, said Ma. We should not expect a bubble, but we should expect continued corrections in the current bull market. Even if there is a bubble, we should be in a better position to sustain the drop than the previous one, she explained.

Access to information

The subject of data security issues was raised by Raymond Cirz. The panelists agreed that the breaching of data is a serious problem and non-disclosure agreements (NDAs) are often called into play. Clients will demand due diligence from IT departments and may even request to speak with technology directors to address their concerns.

The data itself can also be problematic. When it comes to appraisals, indexing can be useful only if applied properly. The index will tell you what the overall market is doing, but as an appraiser, you must focus on the specific sector you are in.

Two guides commonly used in asset valuation are RICS Valuation – Global Standards (RICS Red Book) and the Uniform Standards of Professional Appraisal Practice (USPAP). The panelists confirmed that the Red Book is the global industry standard for RICS members; it also provides guidance on the rules of disclosure by answering questions such as “What is the purpose of the report?” and “Who can rely on it?”

USPAP is also a standard in valuation analysis throughout the United States but Cirz said the USPAP guide goes too far with its evaluation requirements.

Mitigating the risk

The four speakers agreed on the importance of educating the next generation to make well-reasoned and researched valuations in order to mitigate risk. A solid education and the tools required to make reasoned judgements and verify data are important for generations that are comfortable relying on technology. The data must be questioned by knowledgeable experts to ensure accuracy. There is also a need to encourage younger generations to pursue careers in the construction sector.

By Adam Doudiet, NYU Master of Science, Real Estate Development, 2018