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WELCOME SOUTH DAKOTA TO THE EVALUATION WORLD

JUNE 29, 2020 – South Dakota has become the 11th state to allow licensed/certified appraisers to perform non-USPAP Evaluations.  We have 39 more to go:)  When we get back to in-person classes, if you are in a state that allows non-USPAP Evaluations, I have a 7-hour seminar on Evaluations and Validations that I will gladly come and teach.  I don’t teach over the web.  I can only share my 28 years of experience with Evaluations in person.  The Appraisal institute’s news item on this follows:

South Dakota Passes Legislation Allowing Appraisers to Perform Evaluations

South Dakota Gov. Kristi Noem on March 4 signed HB 1127, legislation that allows appraisers to provide real property evaluations to federally regulated financial institutions. When the law takes effect July 1, the state will join at least 10 others that allow appraisers to provide evaluation services. Several other states are considering similar laws.
Evaluations provided by appraisers must conform to Interagency Appraisal and Evaluation Guidelines. South Dakota’s secretary of the Department of Labor and Regulation will be authorized to promulgate rules relating to “exemptions and standards allowing appraisers to perform an evaluation for a federally insured depository institution.”
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Everyone stay safe.
The Mann

SOME MORE REAL ESTATE PRICE DISCOVERY INFO

MAY 31, 2020 – The following information comes from an article by NREI:

Some investors are looking to the Green Street CPPI for insights on pricing shifts. Green Street Advisors’ methodology is an appraisal-based index (versus closed sale transactions) that also is heavily weighted on institutional quality properties. Its CPPI for April reports a -9.4 percent decline across all property types, 133.5 down to 120.9. (100 on its index is equal to all property values in mid 2007.)

The biggest declines came on malls and strip retail, at -20 percent and -15 percent, respectively. Those sectors that held up better amid building COVID pressures were industrial, self-storage and healthcare with more modest declines of -5 percent. Green Street also acknowledges that exact numbers of value declines are “debatable” and difficult to calculate in a climate where pending deals have stalled or gone off the tracks all together.

 

LAST UPDATE ON REAL ESTATE AND STOCK MARKETS FOR AWHILE

MAY 29, 2020 – We have come a long way since the stock market bottomed on March 23rd and the Fed released an infinite amount of liquidity.  For 6+ weeks, the stock market traded in a narrow 10% range.  Then this week it finally broke above 25,000 on the DOW and has achieved the higher end of the rally targets.

Public sentiment has gone from the world ending in late March to bullish extremes that exceed the February all-time highs.  As I noted in March, the rally would wipe away all fears and it has.  Even Millennials have been turned on to day trading.  Gamblers with no sports to bet on but horse racing have also turned to day trading.  Robinhood is trending as they say nowadays.  Heck, even yours truly opened a Robinhood account to buy bitcoin with.  In a matter of minutes I owned some bitcoin.  Amazing how easy it is nowadays to open an account an invest.  Er, gamble.

I am glad I am on the sidelines still.  Corporate earnings will continue to decline the rest of this year.  Economic recovery will be in the shape of a Verizon swoosh that will take 2-3 years to see us get back to within say 20% of the prior peak.  But, with QE Infinity, asset prices might continue higher.

In the major 1973-1974 Bear Market, stocks dropped 45% while corporate earnings went up.  Regardless of what the Fake News Media tells the masses, there is no relationship between stock prices and underlying corporate earnings.  So, there is a chance this time around while earnings fall, stock prices may continue higher.  We shall see.  I am content holding my dividend stocks that are yielding 5%-8%.  If the prices go up, great.

As for real estate, it will be in to next year before we have an ample number of transactions to analyze.  Price discovery was made in April.  The market is just waiting for sellers to face reality and buyers to realize they won’t be getting major steals.  There is already some evidence that the price declines have begun to shrink.  As we move along the Verizon swoosh, we get closer and closer to recovery and thus prices slowly rise.

Also, there is talk that investors seeking any kind of yield in a zero percent interest rate environment will see that real estate cap rates of 4% and 5% and 6% and higher are exceptional.  There is literally TRILLIONS of dollars on the sideline waiting to be invested.  If some of it pours into real estate, cap rates will decline and prices increase.

The last 7 months of this year will be interesting to watch.

One last thought is in regard to what the stock market is forecasting.  As it projects out 6 months into the future, what has it told us.  First, something MAJOR is to occur around September.  What will that be is the question we should be focused on.  Possibilities I can think of…..the USA and IRAN get into a military conflict…..VP Biden drops out of the race due to a scandal or there being a true mental health issue (I am not saying there is one…..brainstorming things that would be a major shock is all)….or Trump dropping out for any reason (health or political).  We shall see what happens at the end of the Summer.

Also, six months out puts us past the November Election and the market is apparently happy as can be with the result of that event.  A Trump victory is the most obvious explanation for the stock market rising over the past 2 months.  If Trump loses, the market appears to be saying the two houses of government will remain split between the parties and thus gridlock will remain.  The stock market does not seem to give any chance to the Dems sweeping everything.

As a reminder, the DOW figure to watch is 23,377.  A close above that on October 31st suggests Trump wins.  Below that, he loses.  In February, when we were above 29,000 this figure didn’t seem pertinent.  Then we got down to 18,100 or such and again this figure was out of range.  But, now it has been in play constantly.  We are 5 months away from decision time.  A LOT will happen in that time.

I will close with my newest pet peeve:)  I must have a million of them by now, lol.  I am so, so sick of companies airing commercials about how great they are for helping people out during this crisis.  People hate people that brag about themselves.  Companies need to STFU and just give back as they can and they will get recognition from those that receive their generosity and word-of-mouth will take care of the rest.  But, we’re Amazon and we are so great for giving this amount and we’re Apple and blah blah blah.  Save the money you spend on commercials patting yourselves on the back and spend it on the people and entities that need help.

On the subject of commercials.  Do people actually buy something because they see a commercial?  I have never done that.  Do people actually click ads that pop up on a website?  I have never done that!  In fact, I cannot remember ever seeing an ad on Amazon or Facebook or Youtube or Dropbox or anything.  I have used every website for free for 20+ years now and never once clicked an ad or really I cannot even recall seeing an ad.  I have always wondered how Facebook and Twitter and YouTube make money.  Oh well, label me clueless:)

ADD JUNE 4 – Oh gaws, does every company and organization need to put out a public memo saying they aren’t into racism.  Geez, I didn’t know that.  I was certain that Apple and others have in their Personnel Handbook that that are into being racist.  This news is truly shocking to me.  I am so glad they made this announcement.  Time to go to the porcelain altar.  What a bunch of loser lemmings.

Oh, one other item.  Please do not listen to the Fake News Media and politicians that will be saying this Fall and Winter that the increase in COVID-19 cases is because we opened too early.  When you hear such, just say BS!  Those increases will surely happen.  Our re-opening (I am so happy to be in South Carolina – we were last to close and first to open….you don’t mess with our liberties in the South!) is well planned and needed and will not be the cause of the second wave …or possibly a third wave next Spring.  But, I guarantee the Fake News Media and let’s just say it out loud, the Dems, will blame any increases on reopening too early.  Of course, they won’t be talking about the majority of cases now and then being in their jurisdictions.

I would place a bet that in 5 or 10 years there will be evidence that more people will have died from the lockdown than from the virus itself.  The damage to the income and wealth generation of Gen Y will far exceed what the virus cost us.  Poor Millennials/Gen Y, they just weren’t meant to have a good existence on this rock.  But, when you are the first years of The Dark Ages II, you know you will have a brutal time of it.  But, not near as bad as generations 100 and 200 years from now.

I will talk about real estate and stocks down the road as things perk up.  We are just past the period of chaos.  Now we live out the long, slow recovery.  Which can still have some downside here and there in various sectors and markets.  Not everyone is going to be seeing improvement.

Thanks again to everyone that is sharing information with me.  I really appreciate it.  It has been very beneficial over the past 3 months for sure.

Please stay safe.  Over 330 million Americans have NOT got COVID-19!  Quoting the title of one of my favorite rock songs by Halestorm, Here’s To Us!

The Mann

VALIDATIONS

MAY 29, 2020 – Validations are the little known and little used product that get overlooked in the world of Appraisals and Evaluations.  The December 2010 Interagency Appraisals and Evaluations Guidelines (IAEG) document has the following section that addresses Validations:

XIV. Validity of Appraisals and Evaluations
The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. Therefore, an institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid). Such criteria will vary depending upon the condition of the property and the marketplace, and the nature of the transaction. The documentation in the credit file should provide the facts and analysis to support the institution’s conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as:
 Passage of time.
 Volatility of the local market.
 Changes in terms and availability of financing.
 Natural disasters.
 Limited or over supply of competing properties.
 Improvements to the subject property or competing properties.
 Lack of maintenance of the subject or competing properties.
 Changes in underlying economic and market assumptions, such as capitalization rates and lease terms.
 Changes in zoning, building materials, or technology.
 Environmental contamination.

Validations answer one simple question – is the value of the real estate collateral equal to or greater than the value in a prior Appraisal or Evaluation?  If so, then that value can be brought up to today.  If not, then a new Appraisal or Evaluation is needed.

Validations are useful in level to rising markets.  They are not very useful in the current market conditions.

However, not all property types have experienced a value decline this year.  In general, industrial properties and national tenant leased properties where the tenant has a bond rating A and above, are still candidates for Validations.  Apartments might be depending on the age of the prior Appraisal or Evaluation and the property location.

I have updated the Validation Report that I originally developed in 1994.  This report is intended to be used by internal bank employees.  It is not for use by fee appraisers, as it does not comply with USPAP.  If you are a bank employee and want a copy of my report template, just email me at GeorgeRMann@Aol.Com.  I will send it to you for free:)

It took me 25 years to finally get Evaluations to be mainstream.  Validations are next.  They are under utilized.  Albeit, today’s market is not ideal for them.  But, we will get back to market conditions where they are useful again.  My plan is to design a Restricted Appraisal Report (RAR) specific to the Validations need for fee appraisers to use.  But, at this time, this is not needed for the most part.

Again, bank staff please contact me if you want a copy of my template.

Everyone stay safe.

The Mann

STOCK MARKET UPDATE

MAY 10 – Hopefully everyone had a great Mother’s Day and is staying safe and well.

It’s been awhile since I talked about the stock market.  For over a month now the DOW has been in about a 2000 point range.  Quite a change from days in March where it was up or down 2000 points.  All of this back and forth and the market still hasn’t been able to get up to the 25,100 target.

As I mentioned the last time I talked about stocks, we are essentially in a stalemate.  The market should be declining to the 13,000-15,000 range.  However, the Fed is pumping trillions into the system and this is offsetting the selling.  The experts I listen to are taking the stance I am taking – stand aside and wait for a break in one direction or another to occur.

If you have had read my blog and white papers over the past decade, you know I harp on price and value being two very different things.  In real estate, prices rarely reflect the current value of the underlying asset.  Albeit market participants and appraisers believe sale prices are a reflection of market value.  They aren’t.

I bring this up because we may be encountering a historical disconnect between the value of companies and the price of their stock.  A company that was worth $100 a share before the virus hit might now be worth $80 (value is extremely slow to change for large corporations, so a 20% decline is beyond extreme).  However, if the trillions being pumped into the system goes into the stock market in some amount, then that stock that may have went from a high of $150 down to $75 in March and may now be $125.  And might go even higher.

Money is pouring in regardless of what the underlying asset is worth.  Re-inflating prices is what the Fed did starting 12 years ago and it worked for most asset classes.  They are doing all they can to make this happen again.  One day the house of cards will crumble and it won’t be pretty.  They might be able to avoid the end game this time, but I don’t think they will the next time things fall apart.

Right now the World’s Largest Casino (stocks, bonds, currencies) is open and gamblers are taking their position on how things will play out over the next 6-24 months.  But, these are simply gamblers.  True investors are still uncertain of the future and are standing aside.  There are no new mergers.  No new commercial real estate transactions.  When Sam Zell says he is still uncertain of how this will play out and is doing nothing, that speaks volumes.

As they say, better safe than sorry.  Capital preservation is key.  Don’t jump into the game too early.  Be patient.  It is ok to miss the exact bottom and wait for the new trend to start.

As a side note, remember that this is not a liquidity crisis.  That has been solved by Central Banks worldwide.  This is a SOLVENCY issue.  Companies will go bankrupt over the remainder of the year because they have too much debt.  It is that simple.  This will also apply to individuals and real estate owners.  Too much debt and you are likely to go under.  As they say, cash is king.  It will be once again during this downturn.

And a side note to the side note….The bond market is pricing in a 28% chance of the Fed Fund Rate going negative!  Some indicators suggest a drop to -2.0%!!!  Everyone says negative interest rates are not coming to America.  Even Fed presidents say that.  The only problem is the Fed FOLLOWS the bond market.  The bond market will dictate whether America goes to negative interest rates.  Right now it is just starting to head in that direction.  There will be more to discuss as this unfolds going forward.

Unemployment came in at 14.7% albeit the U-6 (whatever that is exactly) suggests we will see 23%+ next month.  The analyst I mentioned that forecast 16.5% was a bit high.  For historical perspective, we went from unemployment rates at 50 year lows to 90 year highs in a month or two.  Just insane, eh.

It’s  a big week for Bitcoin as the 4-year ‘halving’ occurs.  Since I suggested to my friends a month ago to buy some it has gone up 50%.  However, the expectation is still a 10x move from here by the end of 2021.  It seems like everyone is aware of the halving and past events and have been buying in advance.  Since past history has shown a 10% to 30% decline in price right after the halving, that would surely shock the newbies to Bitcoin.  The public usually gets on board when it is too late and then dumps when things turn against them.  I will be watching for some kind of correction between now and the end of June.  If it occurs, I will hop on board and hope the 10x unfolds as predicted.

Brent Crude is back over $30 a barrel.  Many oil stocks, e.g. Exxon, are up over 50% from their lows.  The damage will last at least another year or two.  But, oil and gas are not going away regardless of what the tree huggers wish and say.  The more electric vehicles they make the more fossil fuel using power plants get built.  Plus, 95%+ of vehicles will run on gas for many decades into the future.  It is unlikely Millennials will live to see a serious decline in the use of oil and natural gas.  There simply are no viable alternatives.

The Fake News Media likes to make the masses think oil and gas are on their way out.  They do the same with meat.  They even talked people in to creating fake meat.  Fake meat means it is NOT meat!  Fake meat is an oxymoron!  But, more importantly, projections call for meat consumption to be 70 percent higher in 2050 than it was in 2010.  PETA won’t tell you that though:)

I only bring the above items up because it all goes back to my constant reminder – EDUCATE YOURSELF!  I think we can switch up an old joke – How can you tell if a broadcaster is lying – s/he is moving his/her lips:)

Educate yourself and then make your own decision.  Think for yourself.  You will be much better off in life.

Stay safe.

The Mann

GUEST POST – BY JOHN CULBERTSON, CCIM, CRE, SIOR

MAY 5th – Happy Cinco de Mayo!  Below is from John Culbertson, CCIM, CRE, SIOR of Cardinal Partners.  He can be reached at jculbertson@cardinal-partners.com.

John gave me permission to reprint this.  I totally agree with his take on this subject.  I don’t only post things I agree with – I  am open to anything that makes people think.  Of course, non-political, non-religious, no insults, et al.  I hope you find John’s thoughts of use as you hear people all over saying work from home is here to stay and office buildings are in big trouble, et al.

Stay safe.

The Mann

Dear El Cardinale,

As people get used to Zooming and working from home in their pajamas, do you think the way we work has changed forever?

– Homer

Dear Homer,

You are right in that we are likely to make some tweaks to our work habits because of the unprecedented order to work from home. However, I don’t think this will change the way we will work in the future.

To start, new habits are hard to form. Research shows it takes 21 days of conscious, enthusiastic, and consistent effort before a new habit is formed. I’m what I call a habit cultivator, and I know how difficult it is to create new ones. To some extent, the degree to which our working habits change will be tied to how long it is before the all-clear whistle blows.

There also are other factors to consider.


  • The fiefdom. The physical office is where the boss is, and he or she often likes his or her fiefdom. The person that pays your salary likes to see employees busy at work. Your employer also has a huge commitment to that fixed cost of the office that they don’t want to see wasted.



  • Long-term commitment of office space. Office leases are usually seven years long on the short end, with facility expenses usually being one of the top three expenses for any company, this represents a sunk cost that the company is going to want to use as an asset.



  • Lack of suitable infrastructure. I have an Asian client that is struggling now in part because they don’t have a lot of experience with working from home. Their residential areas do not have adequate bandwidth, and homes tend to be smaller, meaning less space for an office. I suspect they will return to working from an office setting as soon as their government allows it.



I view what’s happening now akin to when one takes a sabbatical. There are some occupations and cultures where every three years or so people are expected or offered the chance to take a month-long sabbatical. Some people study or conduct research in another country, while others may simply check out of their daily routine. When they come back, they may be refreshed or rejuvenated, and they may have new ideas. But typically the way they work hasn’t drastically changed.

By the way, Microsoft disagrees with me – here is a link to a deeper dive. But I am an Apple guy 😉

My suggestion is to enjoy this unexpected sabbatical that has been thrust upon us and to look forward to returning to a new normal with some new ideas and a fresh outlook.



 

 

CAN LOAN OFFICERS TALK WITH FEE APPRAISERS? YES, BUT…..

April 30 – In the past 30 years, my wife and I have worked at 4 large banks ranging in size from $150 Billion to over $1 Trillion.  At all of these banks loan officers were allowed to talk directly with fee appraisers about the subject collateral.  Obviously, there were important restrictions on what could not be discussed – e.g. value.

As many banks do not allow loan officers to talk with appraisers at all, I took a survey of some Chief Appraisers and Chief Credit Officers to get their viewpoints.  Their anonymous responses are below.

First, I talked with the Federal Regulators that write and interpret FIRREA guidance.  It is not against any law or guidance to allow loan officers to talk with fee appraisers directly.  Each financial institution can decide how they want to handle this issue.  Those institutions that allow such contact should provide training to their loan officers and also make it clear to their fee appraisers what is permitted to be discussed.  ((NOTE: I promise the Regulators I will not publish any written responses they provide.  Therefore, I cannot provide their exact reply.  Feel free to call them if you doubt the above is their response.))

I always like to present both sides of an issue.  Then you can decide which side you prefer and have information to defend your stance.  The responses follow in no particular order.  Editing is minimal and mostly limited to getting rid of the use of my name or any personal discussion or anything that would identify the author.  Again both sides are represented, so there is no attempt to influence you to go one way or another.  It is you and your financial institution’s decision.

Stay safe.

The Mann

If there is information that is pertinent to the appraisal, then yes, the LOs or property contact can provide property specific information during the appraisal process. It helps in the exchange of information to the appraiser. However, many times, they would rather communicate through us, but it just depends. They know they cannot discuss value, fees or changing delivery dates.

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We require any and all info to go through the appraisal department, however if there are complex issues regarding the assignment and the loan officer has an extensive knowledge of the property we may refer the appraiser to them if it is necessary for credible assignment results.

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We recently provided training on AI rules, prohibited topics, and provided examples of various influence e.g. bribery, coercion, etc.  Once a lender has undertaken training he may speak to an appraiser after engaged, but only in response to inquiries regarding property.  I prefer all conversations are monitored by my team.  Lenders are not allowed to initiate dialogue with an appraiser at any time or discuss appraisal after receipt of report.

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during the assignment, the appraisal department must be aware in advance of all communication between the loan officer and the appraiser.  This allows the department to monitor any potential change in scope of the appraisal and oversee appraiser independence.

The reality is that some loan officers can be trusted not to “cross the line” in their conversations with appraisers, and others, maybe not so much.  Our policy allows the appraisal department access to those conversations.  The bias of the borrower is obvious and expected by appraisers.  However, since the appraiser’s client is the bank, and loan officers are representatives of the bank, their influence on the appraiser can be significant.  Independent oversight is therefore important.

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after the assignment is awarded, we do not categorically restrict all communications between the LOB and the appraiser but do ask that all communications concerning needed information and clarification go through the appraisal department so that we can keep track of the status of the assignment and to facilitate the flow of information. We prefer to keep copies of any data shared with the appraiser so we can understand what is going on. However, sometimes direct officer contact is not possible to prevent. If the issue is needed information, we are more lenient,  but if the officer oversteps their role and starts raising value or timing issues, then they likely will be contacted by the job manager. Direct contact has not been a major problem in many years and on the rare occasions it does occur, it’s typically a new officer hire!

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I think it depends on the size of the organization. In our case, we do not have an “appraisal department” so the Lenders do issue the Appraisal Engagement letters, send copies of leases, tax cards, the contact number of the Borrower, etc. While not prohibited, once the appraiser is engaged and the name and contact number of the Borrower is provided, the appraiser usually does not have any more contact with the lender unless there is a need for some type of clarification, until the final report is delivered.  The lenders do not pick the appraiser, we have a process in which they go to a single person that gives the name of the next appraiser on the list, or in limited cases they give a couple of names for an expensive appraisal to make sure the fees charged are fair. In that case a couple of appraisers would be asked to give their bid for cost and delivery date. Without naming the appraiser, the Lender may have a situation in which one has lower price but a longer delivery time frame so the lender would ask the Borrower (without naming the appraiser) which is more important, price or delivery date to determine the appraiser. Once the appraisal is received by the lender, if there are any issues that need to be addressed (after your review) the Lender makes contact with  Appraiser to point out those issues and requests a re-submission/correction, etc.

 So in summary that is what we do, understanding our Bank size does not afford us the luxury of having an appraisal department. I think our process maintains the integrity of keeping the appraisal assignment away from the Lender, but, it would be too cumbersome to keep the exchange of initial information regarding the assignment (leases, tax cards, addresses, surveys, etc.) away from the lender. And, as you know,  we could not just assign such a task to just anyone, so the instructions for the appraiser need to come from someone that has some understanding of appraisals and the subject property.

 Finally, our lenders do not question the appraiser on a final value unless the Review results in a questionable value. And, our lenders do  not discuss “where the value needs to be to make the deal work” or any such discussions during the appraisal process. And, of course we have an approved list of appraisers that we use, divided by residential and commercial designations.

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we do not allow the line of business to communicate with the appraiser. All information from the line runs thru the appraisal group.  If the line is involved in any way having contact with the appraiser the appraiser always shows some allegiance to the line of business blurring the true client in the assignment which is the appraisal group. It so pure allowing no contact.   on occasion when we allowed the line to direct info or other communications directly to the appraiser, the appraiser even copied the line on the completed appraisal and all other communications making our job much harder
 Bottom line if it’s absolutely necessary to involve the line in having contact with the appraiser only due to complex assignments, we will but put in hard stops with the appraiser
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We allow the loan officer to have very limited contact, but they are allowed to discuss factual information about the property and coordinate site visits with the appraiser if they need to see the property and it is too disruptive to have multiple inspections. The appraisers and account officers are cautioned to not discuss anything related to value, whether that be the actual value, investment parameters, rents, etc.

If there is any question as to whether an account officer might cross the line, we require that someone from appraisal be on the call.

We actually have “relationship managers” and “account officers”. The RMs are more salesmen, are closer to the borrower, and have more to gain by trying to influence an appraiser. We try to limit their access to the appraiser to none if possible. There have been a few that consistently try to cross the line (usually only the smaller loans and SBA loans as far as I know). The institutional property group RMs are rarely a problem, although when learning they might make a mistake. They learn quickly though. The account officers are in a different role and are in general much more professional and aware of the consequences. They will generally ask permission first if they want to talk to the appraiser, or will send comments / concerns to me and I filter and pass along to the appraiser.

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We eliminate any loan officer communication with appraiser. Safe full proof approach. Unfortunately I’m heavily involved in all aspects of the appraisal process but necessary due to loan policy. Have a great weekend.

HOW FAR HAVE REAL PROPERTY VALUES DROPPED?

UPDATE MAY 11 – I think I mentioned in a prior post that about 1/3 of all restaurants are expected to close and stay closed.  Alternative use for those will be interesting.  Also, the expectation is that 20% of hotels may not reopen.  The almost unanimous alternative use is affordable housing.  That is probably a win-win for the housing industry (more supply in the much needed lower price range) and hospitality industry (lower supply in a future world of lower demand).

APRIL 30 – Although it will likely be 3-6 months before we have closed transactions that were negotiated during the COVID-19 crisis, that doesn’t mean real property values haven’t already declined.  Key indicators are available that provide an indication of how much prices have likely declined.  Reduced asking rents, increased vacancies, increased cap rates, and lowered list prices are among the indicators that we can analyze.

Based on my analysis of these key indicators, I believe prices have already DECLINED as follows:

5%-10% for residential, 10% for apartments, 50% for golf courses, 30% for hotels (economy 20%), 5%-10% for industrial, 20%-30% for office, and 25%-35% for retail.  Obviously, these are general figures and specific properties can be doing better or worse.  It is likely another 5% to 10% decline over the next year will occur.
One exception exists to the above…A flight to quality is occurring worldwide.  U.S. Treasury Bonds and the U.S. Dollar have been beneficiaries during this crisis.  In real estate, Net Lease properties appear to be the only property immune to a decline in value.  However, the Net Lease market appears to be bifurcated.  Most of the investor interest is directed towards corporate tenants that have top tier credit ratings (Moody’s – A3 and better; S&P – A- and better).  These properties are experiencing cap rate compression and thus higher prices.  At the other end of the spectrum are corporate tenants with credit ratings in the B’s.  Analysts are forecasting that 40% of corporate bonds rated investment grade will be lowered to junk status.  These properties are subject to negative price adjustments as credit ratings are lowered and cap rates rise accordingly.
Hopefully, appraisers are applying Market Condition adjustments to all sales and adjusting the various factors in the Income Approach accordingly.  It is no longer acceptable to use a 0% Market Conditions adjustment or the excuse that transactions aren’t available so it is not possible to know what has occurred.
As I have preached for 10+ years, Germany has performed Mortgage Lending Value appraisals for 120 years without using sales transactions.  When the American appraisal industry started in the 1930s it didn’t base Market Value on sales transactions either.  Appraisers do not need comparable sales to know what Market Value is currently.
Best of luck out there.  Stay safe.
The Mann

WEEKLY UPDATE RE REAL ESTATE AND STOCKS

UPDATE APRIL 24 – Nothing new re the markets.  A quick note regarding VIs – Virus Incubators.  A report says that 3% of the counties in the USA account for 50% of GDP and 61% of COVID-19 cases.  Until we empty the large cities and distribute our populations throughout the country, we will have disastrous societal problems.  Less density is naturally better than high density.

That is it for this week.  Have a great weekend and stay safe.

UPDATE APRIL 22 – Well, the talk of the week was Oil futures hitting -$40 per barrel earlier this week.  I wish they would pay me to take some oil:)  I am confident we can say this week saw the conclusion of a 110-120 year cycle for Oil.  The next phase will see Oil soar past its prior high just below $150.  I believe this will be more due to the US Dollar’s devaluation and surging inflation than supply/demand factors.  BTW, June 2021 Oil Futures have stayed around $35.  This gives us an indication of where the market thinks we will be in a year.  That is still cheap.

A few other experts I follow (not to insinuate I am an expert….they are though) have also mentioned standing aside to watch who wins this battle between the bulls and bears.  The stock market should decline significantly from these levels.  But, when the world is implementing QE Infinity it is tough to overcome trillions of Dollars and Euros in buying activity.  It is comforting to know others are watching this unfold from the sidelines, too.

NOTE:  Next week I will post how far I believe real estate prices have declined.  These are being published in Mr. Wirgler’s next Broker Log Report so I want to let that get disseminated first.  I have analyzed several key indicators in a variety of ways and the data is fairly consistent.  So, I am confident enough in the indications to publicize them.

My side commentary this time is about the public and how they usually get things bass ackwards.  When gas prices are low, like now, I ask why aren’t people complaining about C-Store operators gouging them now?  Why do people think C-Store operators are ripping them off when gas prices hit $3 or $4 per gallon?  The operators have virtually no control over gas prices!  When gas prices are high, they still make the typical 20 cents or less per gallon.  As a percentage, their profit declines as gas prices go up!  I read that right now many operators are making up to 80 cents (!!!!!!!) per gallon.  Even if they were only making the normal 20 cents, the percentage would be 10%-15% versus 5% when prices are high.  The time for the public to scream about C-Store operators is when gas prices are low….not high.  But, no one has ever listened to this argument….so nothing will change.  But, I do feel better venting:)

Some Baby Boomer humor in this regard….today is like it was when I was 16 years old – gas prices are low, but I am grounded at home:)

Make a note to come back to my blog next week to see where I think real estate prices are today.

Stay safe.

The Mann

APRIL 19 – First, I hope everyone is well.  Continue to stay safe.

Stocks have been in a trading range for a few weeks.  This has helped many indicators get out of extreme oversold levels.  As I forecast, many analysts are taking credit for going bullish at the March lows and claiming a V-shape recovery is underway.  Admittedly, we are at that point where there is some support for us being in a new Bull Market versus the Wave Theory still calling for the next wave down to be worse than what we saw in March.

The bullish case has some solid support.  Amazingly, during the initial crash from near 30,000 to about 18,000 in the DOW, over 100% of the decline occurred during the gap down openings!  What occurred in this time frame was extreme buying by the professionals while the public was selling.  I have to admit it is tough to bet on the downside when the pros have bought while the public was throwing in the towel.  Also, very difficult to fight unlimited QE.  I am going to stand aside and see which way this goes.  There is no stress if you are on the sidelines.

I mentioned the ETF VNB in March.  It has recovered from about a 7% discount to NAV to being above NAV now.  This suggests bonds have been repriced to the market’s satisfaction.

Real estate markets are starting to gel regarding forecasts.  Hotels appear to be the first to show a value decline around 30%.  This applies to the mid-level to upper-end hotels, especially those that have closed down.  Economy hotels along interstates have not been hurt as bad.  Contractors and travellers (who are those people! lol) need a place to stay.

The forecast for office buildings has very divergent opinions.  One side believes that people have learned to work at home and many will not go back to the office.  The positive side sees the amount of space per employee increasing drastically due to a desire for some distancing.

I have always, and continue, to disagree with the at-home work movement being successful and significant.  In 1995 when I was getting my MBA, the prediction was by 2000 most people would be working from home.  25 years later this has not come to fruition.  And it won’t because of this virus.  Why, you ask:)

For the same reason as in 1995, humans are a social animal and we prefer to be together.  Also, people like to look you in the eye when decisions are being made.  What I found with email (and the blackberry, remember those) is it was a way for companies to bring work in to your personal life.  Of course, they don’t want you bringing your personal life into the work day.  But, having you work at home in the evenings is ok.

Employers want to have control over their employees.  They want you in the office.  It is not the employees choice how this plays out (Millennials will of course disagree as they think they can dictate to employers what working conditions should be….that is for sure dead now.).

Zoom and such is not a reason to expect more people to work from home.  Zoom is simply a conference call.  We have been able to communicate in groups for 30+ years.  I had my first Zoom meeting with about 20 people last week.  My observations were I am looking at a Brady Bunch intro for an hour and I am distracted by watching the faces of 20 people looking at their computer screen looking at 20 people looking at their computer screen.  Not a thing has been added to the phone conference call.  ((Side note….the meeting was fruitful regarding the information we all shared. But, a phone conference call would have accomplished that, too.))

Where I see videoconferencing having an effect is on business travel.  I see there being two types of company meetings – IntraOffice and InterOffice (both copyrighted, April 2020).    Per above, IntraOffice is not going to change.  Employers are going to make their employees come in to the office.  What might change is a movement back to the Baby Boomer way of doing things – having private offices and less of this common area stuff for employees to gather around and chat and whatever.  You can go back to doing that at the water cooler:)  So, the trend towards less square footage per employee could reverse.  Maybe we will go back to needing 250-300 square feet per employee.

Obviously, I believe executive suites (temporarily known recently as shared work areas…e.g. WeWorks) are dead for another 20 years.  The concept has always been on the fringe and that won’t change.  I think ‘hoteling’ (I recall that starting back around Y2K with accounting firms initiating such) will be adversely affected, too.  I sure wouldn’t want to go into an office that someone else has been in for the last few hours.  Or at least not until someone comes in and decontaminates it!

Where I do think a permanent change is occurring is what I term InterOffice – travelling to other corporate locations around the nation or world.  The current crisis has made it very difficult in the future to justify to your manager that your staff needs to go to New Orleans to have a sales meeting and brainstorm and plan for the upcoming year et al.  All of that travel cost and time away from the office is going to be hard to justify in comparison to a Brady Bunch, er Zoom, meeting.  This doesn’t hurt the office market.  But, it does hurt the airline, rental car, taxi, hospitality, and restaurant markets.

One last argument for the plus side and one for the negative side as I write this and listen to various experts speaking (I must spend 5-8 hours a day right now just listening to various experts that predicted this crisis….can’t wait for things to calm down so I don’t have to listen to all of this every day!).

Positive – I was very surprised to hear that a survey of Millennials showed that 77% prefer learning in a classroom to online.  For a generation raised on technology, this certainly shows that the human species prefers in-person interaction.  Also, with my wife being a former teacher, she points out that only in-person learning will account for all the different ways individuals learn.  That cannot be accomplished online.  This supports the argument for an increase in office demand as employees remain in the office, but require more private space.

Negative – A demographer I was listening to said that worldwide the number of professional workers is going to decline 8% to 10% over the next decade.  This directly reduces the need for office space.

As of today, that is all I know about the office and hotel markets.  I always encourage you to gather all of the information you can and make your own decisions and forecasts.  Do not blindly listen to the Fake News Media and the pundits they bring on.  Think for yourself.

I have absorbed information on other real estate property types.  But, this is already a long post.  I will address the other types over the next few weeks.  Hopefully, I will obtain even more information by then.

Thanks again for all that send me information they come across.  I truly appreciate it and I try to digest it and put it here on my blog.

I look forward to seeing which side wins the Bear/Bull stock battle.

Lastly, one of the experts I subscribed to did a lot of math and predicts a 16.5% unemployment rate when the May 8th report comes out.  I like when someone shows the math and the reasoning for a projection.  We shall see how that turns out.

Stay safe and well.

The Mann

Facilitating Real Estate-Related Transactions Affected by COVID-19

Summary

The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System (collectively, the agencies) issued an interim final rule (IFR) that allows institutions supervised by the agencies to defer obtaining an appraisal or evaluation for up to 120 days after the closing of certain residential and commercial real estate loans. The agencies, with the National Credit Union Administration and the Consumer Financial Protection Bureau, in consultation with the state financial regulators, also issued an Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (Statement). The Statement outlines existing flexibilities provided by industry appraisal standards and the agencies’ appraisal regulations and highlights temporary changes to Fannie Mae and Freddie Mac appraisal standards to facilitate real estate transactions.

Statement of Applicability to Institutions under $1 Billion in Total Assets:

This Financial Institution Letter (FIL) applies to all FDIC-supervised institutions.

Suggested Distribution

FDIC-Supervised Banks

Highlights:

The agencies recognize that the National Emergency declared in connection with coronavirus disease 2019 (COVID-19) presents challenges for individuals performing appraisals and evaluations to perform inspections and complete valuation assignments in a timely manner.

  • The IFR:
    • Defers the requirement to obtain an appraisal or evaluation for up to 120 days following the closing of a transaction for certain residential and commercial real estate transactions, excluding transactions for acquisition, development, and construction of real estate
    • States that the agencies are providing this relief to allow regulated institutions to expeditiously extend liquidity to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of COVID-19.
    • Indicates regulated institutions should make best efforts to obtain a credible valuation of real property collateral before the loan closing, and otherwise underwrite loans consistent with the principles in the agencies’ Standards for Safety and Soundness and Real Estate Lending Standards.
    • States that this temporary change to the appraisal rules expires on December 31, 2020.
  • The Statement:
    • Outlines existing flexibilities in the Uniform Standards of Professional Appraisal Practice and the agencies’ appraisal regulations.
    • Advises that there are temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time.