August 12, 2016 – 24+ years of being a reviewer, I continue to find it preposterous that appraisers use a 0% vacancy rate when valuing properties with long-term leases to national tenants.  Have we not seen enough bankruptcies and vacant big boxes and restaurants and drug stores to finally acknowledge a 5%-10%+ vacancy rate is warranted for these properties?  I have always argued that national tenants are riskier, not less risky, than local tenants.  Why?  Because they have better lawyers!  They can use bankruptcy or a number of ways to get out of leases.  If I sign a lease, I have no chance of getting out of it.  Dollar General signs a lease and they can get out of it.

Yesterday, Macy’s announced the closing of 100 stores.  Today, Ruby Tuesday’s announced the closing of 95 restaurants.  Logan’s Roadhouse filed for bankruptcy this week and will close 18 restaurants.  WalMart and Target have announced store closures this year (BTW, WalMart is pricing their closed stores at about 20% of the project costs to build them just 2-3 years ago….yes appraisers, price equals value…NOT!  It is likely the same appraisers who valued these at $3.5mm in 2013/2014 will appraise them today at $700,000!  They will laugh and call it job security.  America really needs to place liability on appraisers like they do in Europe – the full value that the appraiser concludes at they can be sued for!).

Of course, the ridiculous reply the vast majority of appraisers provide is ‘The market does not deduct any vacancy or expenses, so that is why we don’t.’  As you know, I have long argued that it is not our job to reflect the market.  Reflecting the market simply provides Market Price and anyone in the public can do that nowadays.  Market Value is not Market Price and value is not based on prices unless the market is in equilibrium – which is almost never.

Per Mann’s Axiom – If the market says it is so, it isn’t!  The market is almost always wrong.  Studies have shown that investors have overpaid for properties by around 20% for almost 30 years now.  These are the smartest investors in the world.  Why are they so far off in what they pay?  I believe prices are inflated for two reasons – 1) Investors significantly underestimate potential vacancy, and 2) Investors underestimate expenses.  The studies have shown that actual returns are 20% below expected returns.  Obviously, the market’s expectations are, and have always been, wrong – way wrong!

Appraisers who want to use 0% vacancy and 0% expenses for national tenant properties can continue to play this game and provide Market Price.  Many clients simply want that.  It is what keeps REITS and CMBS and Wall Street and national appraisers making their fees.  But, these prices are not indicative of value.  Clients deserve to know the underlying value of these properties.  They already know what the prices are – without hiring an appraiser to provide a Confirmation Report.  Real appraisers will deduct realistic vacancies and expenses and conclude a real market value.

Will the real estate appraisers please stand up….