Michael Scott, the regional manager of the fictitious paper company Dunder Mifflin, is the only one left in the office. Pam and Jim left the firm, got married and are now influencers. Dwight left for his TikTok side hustle, while Darryl, Stanley and Phyllis all work remote.
The hybrid workforce has forced office property owners to create more engaging collaborative space, loading up on amenities and much more flexible lease terms. Younger employees don’t want a cubicle, rather they want to learn new skills, test-drive a career change, or pursue a passion.
Vacancies have increased, stressing ownership to meet debt service. So are insurance premiums. County assessors haven’t caught up with reality, putting additional pressure on office borrowers.
Risk to the Institution
The stated intended use for an appraisal for loan origination purposes requires an appraiser to not just pump out the usual appraisal. Rather USPAP’s Scope of Work Rule and Standards Rule 2-2 (a) (viii) requires the appraiser to recognize, analyze and report elements of significant risk to the institution in order to make credible results.
“Gauging the specific risks to a bank takes on a higher level of responsibility.”
Using very old comps untethered from the current market may result in a noncompliant appraisal and potentially a Part 323.4(a) violation. If it was your personal money at risk, I guarantee the valuation would focus a lot more on the risk (how does subject fit in the market) rather than generically checking all the appraisal boxes.
5 Reasons Appraisers Matter
- Due Diligence: getting everything right: physical characteristics of the subject, financial performance, relevant and timely comps and a detailed valuation analysis discussion.
- Risk Mitigation: evaluate financial, legal and operational aspects of commercial properties. They look at occupancy, floor plan functionality, parking ratios that may impact occupancy, tenant credit risk and lease roll-over dates.
- Market Analysis: provide valuable market insight regarding a property’s strengths, weaknesses, opportunities and threats (SWOT). This includes market rents, vacancy rates, cap rates, net absorption and supply/demand.
- Industry Standards and Compliance: check that properties meet legal requirements, including building codes and zoning regulations. It’s important to identify non-conforming use, erroneous building size and rent rolls that don’t tell the whole risk story.
- Transparency and Trust: expertise and independence building trust among stakeholders in real estate transactions. Having the real estate nuance knowledge to provide a supported appraisal reducing collateral risk.
Commercial real estate appraisers and reviewers contribute to informed decision-making, risk management, market analysis, investment guidance, compliance and transparency for financial institutions.
Their expertise protects bank collateral, which is especially important given the pressure on the office sector.
Michael Scott might suggest, “Well, folks, it seems we’ve entered the era of ‘hybrid workers’ where half the office is out enjoying the ‘freedom’ of working remotely, while the other half is stuck here dealing with my legendary management style.”
Dunder Mifflin, welcome to the new office.