Re-Evaluating Valuations: One Year Later
Four months into the pandemic, Meghan Czechowski, valuation lead for Apprise by Walker & Dunlop and managing director of the Midwest Region, advised multifamily appraisers not to jump to conclusions about the long-term impacts of the pandemic. “We did advise caution, and it ended up playing exactly the way we thought it would: results differed market by market and asset by asset. That’s how we approach valuation at Apprise to start with, and that approach is how most of the appraisal industry wound up valuing multifamily throughout the pandemic.”
Over a year after her initial assessment, Meghan spoke again to REBusinessOnline about what has changed in the world of multifamily appraisals and where those changes are trending.
Incorporating Valuation Data from 2020
Early in 2020, there was a general assumption that there would be a discount in multifamily values, but there were no sales to support that assumption until June/July of last year when sales comps appeared on properties in most markets. Now it is essential to ensure that the data Apprise collects reflects the current reality.
Once the shutdowns ended, data collection became easier. Czechowski says that real-time information allowed for an even better way to understand, analyze and adjust for sales. “In many cases, we compare as many pre-COVID and post-COVID sales as were available. In the majority of cases, we found that there wasn’t a lot of difference between the valuations. Now, 15 months later, we’re able to compare five or six sales that transacted after March 2020. From a value impact or return impact perspective on cap rates for multifamily, it’s clear that cap rates have actually compressed, not gone up.”
“It was important to ensure we were analyzing sales post-March 2020. The data indicate that not a lot had changed in terms of investors’ appetite or expectations for rate of return. There were a lot of buyers looking for steep discounts, obviously. However, there were no sellers that were willing to transact at a discount. This meant the multifamily market valuations hadn’t actually been impacted. Now you layer on the fact that two product groups (hospitality and retail) had even more uncertainties associated with them during the pandemic (and resultant shutdowns and economic impacts). The result: all those investors that typically diversify their investments ended up setting their sights on the product types that fared better during the pandemic — multifamily, industrial and self-storage. So, we saw returns or cap rate compressions in many markets, starting in July and continuing through the end of the year. Continuing through the first half of 2021, we have seen multifamily product values increase significantly in many markets.”
Expenses and Renters
The calculations for predicting property income have grown more involved since Czechowski spoke to REBusiness in 2020, but not always in the ways anticipated.
Property expenses have risen slightly due to increased cleaning costs, but the increased popularity of virtual leases has defrayed some payroll costs.
Rent rates have (for the most part) been flat, particularly in the urban core as people moved to geographic settings and layouts conducive to working from home. This trend is starting to reverse, though, as companies are announcing their plans for in-person work.
The impact of tenants behind on rent has been less than was expected in the uncertain early months of 2020, with a resulting positive outlook for valuations. “There was definitely an uptick with some assets,” explains Czechowski. “And that’s what we were looking for with the asset-by-asset and market-by-market analysis. For example, if you had an asset with a significantly higher credit loss during 2020 or in any given month that we were analyzing, we needed to estimate how long it would take to burn that off. We needed to wait for troublesome tenants to be evicted and then account for that in our valuation discount. In conversations with property managers, it became clear that the realities really depended on the market: if you were in tourism-heavy areas like Orlando or next to a large shopping mall or a lot of your residents were working in retail and restaurant work, then you were going to see a lot of distress in those tenants.”
“But, for the assets we were looking at, a very small portion were actually on rent relief,” Czechowski elaborates. “Plus, most of the ones that had some sort of distress got on a payment plan and ended up staying at the property. A lot of owners were willing to work with their tenants to keep that occupancy up and figure out a payment plan.”
Impact on Appraisal Methods
The process of appraisals changed during the pandemic (with the need to skip or alter interior inspections of occupied units for several months), but Czechowski explains that the fundamental needs of valuations never altered. “You needed to have local market experts working in the areas that they know best. You need contacts on the leasing/property management side as well as the investors and investment sales brokers.”
Data Collection and Expertise
Most helpful in marrying the data that Walker & Dunlop has been able to collect and the knowledge of its local experts has been Apprise, a joint venture between Walker & Dunlop and GeoPhy, a global data science company. The focus of Apprise is to make the appraisal process more efficient and well-informed: “Apprise starts with over 2.5 million multifamily property records with direct integration from industry standard resources, as well as a public record aggregator that incorporates assessment and tax information on a parcel level and directly ties to the multifamily record.” This data incorporation means that when analysts and appraisers review a property, data like information on the structure, land records, sales and refinance information from an industry standard resource (like Yardi or RCA) is all available through a single source.
Apprise’s machine learning considers age, built structure, location, demographics and more to make sales adjustments consistent across the board in a streamlined manner. Apprise’s experts are armed with the most recent and relevant data, so they can easily see the lead information of a sale or rent comp, and then call a direct source.
Czechowski outlines the need for expert human involvement to complement Apprises’s powerful platform. With appraisal information they need at their fingertips, appraisers must call the property manager or leasing offices to confirm rents and understand concessions or current occupancies. Appraisers must also contact the investment sale brokers to get valuable income and expense data in order to understand overall the capitalization rate because “that’s what’s driving our understanding of the next valuation and the property that we’re analyzing.”
While Apprise is always focused on making their system more efficient for users (by cutting out manual entries/updating and incorporating the property database into the workflow), the result is that the appraisal itself winds up in the hands of clients faster.