Commercial appraisals in your bank have some AI content.
Some Chief Appraisers have changed their engagement letters to mandate reports to disclose AI-generated content.
That makes sense since AI hallucinations are hard to spot. Especially since AI confidently states things that are otherwise fantasy.
In 2024, a few national appraisal firms are planning for extensive AI use in their commercial appraisals.
The upside and risks are real.
And it’s here now.
While AI offers transformative potential, it’s crucial to weigh both the upsides and the inherent risks associated with its adoption.
Risk: Fantasy Data
This Forbes story about an attorney facing potential sanctions for citing fake ChatGPT-generated cases highlights a huge red flag for the valuation space.
As a quick test, I asked ChatGPT to provide five recent ground lease comparables in my market.
Amazingly it presented exactly what I asked for, five triple net, long-term ground leases to national companies like Dunkin’ Donuts, Starbucks and Chik-Fil-A.
The details included location, sale date, lease details (escalations, option periods) and the parties involved. The problem was the data was 100% hallucination. Total fantasy.
The bigger issue, the data looked perfect.
Upside: Enhanced Efficiency
AI can do a good job on SWOT analysis of a subject property. Try this. Copy and paste a detailed transmittal letter along with the subject property details in ChatGPT.
Ask the prompt: Act like a commercial real estate appraiser and provide a SWOT analysis for this subject. If the subject property discussion is well written, the results can be insightful.
Ask for detailed description of the subject neighborhood including thoroughfares, demographics and new projects. Sometimes these results are a mixed bag but definitely helpful.
Copy and paste an already adjusted Excel adjustment grid into ChatGPT. Then ask the prompt to act like a commercial real estate appraiser and provide a detailed analysis and describe the adjustments. Pretty good results.
Copy and paste pertinent sections of the report and prompt: act like a commercial real estate appraiser reviewer and determine if the final market value conclusion is credible. You might be surprised at the answer. Many review firms are in the process of determining how to best leverage this automation.
A significant risk is the potential overreliance on AI, further pushing appraisers away from talking to market participants.
While AI can process data at an unprecedented scale, it lacks the nuanced understanding that experienced human appraisers bring.
The loss of human insight, particularly in understanding local market nuances and interpreting unconventional data, might lead to oversights that a purely data-driven approach could miss.
Upside: Cost Reduction and Scalability
AI streamlines the appraisal process, cutting down the time and labor involved, which, in turn, reduces costs. For national and regional firms dealing with high volume, AI’s scalability is a game-changer.
The low hanging fruit includes neighborhoods, SWOT analysis, summarizing lengthy zoning descriptions, subject-specific market analysis and image capabilities (describe the physical characteristics) of the improvements based on subject photos.
A Balanced Approach
While AI presents remarkable opportunities for efficiency in commercial real estate appraisals, it’s essential to adopt a balanced approach.
Integrating AI with human expertise, continually refining AI models to minimize hallucinations and maintaining a critical perspective on AI-generated insights are key to harnessing its full potential while mitigating the risks.
As the technology evolves, so must our strategies in implementing it, ensuring that AI serves as a powerful tool rather than a standalone solution in the nuanced field of real estate appraisals.
AI can be used to facilitate excellent analysis.
Or AI can be a hack to cutting corners and quality.
AI stands as a potent tool, one that necessitates judicious and informed application to ensure it enhances, rather than undermines, the quality and integrity of property appraisals.