Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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As a result of these factors, valuing complex properties in primary or large secondary markets is ofen easier than valuing simple properties in smaller markets, mainly because of the availability of market data, which includes more-consistent sales and rent comparables and investor expectations. Yet there are a number of ways that a resourceful appraiser can gather the required data and attain a market value for a property in a small market. Let's look at some of the diferences between primary markets and secondary markets and several ways to value properties in secondary and tertiary markets. Secondary Markets Move Up Over the past decade, the lines between primary and secondary markets have blurred. Real Capital Analytics defnes secondary markets as Atlanta; Austin, Texas; Charlotte, N.C.; Dallas; Denver; Minneapolis; metro Philadelphia; Phoenix; Pittsburgh; Portland, Ore.; Raleigh/Durham, N.C.; Salt Lake City; San Diego; and Seattle; among others. time, the institutional nationwide average cap rate was 7.06 percent, a spread of 129 basis points. A similar property in a larger North Carolina market sold at the same time for a similar overall cap rate. Te main reason for the similar valuations is the tertiary market property is considered a class A location, while the larger market sale is in a class B location. Valuation Techniques To fairly appraise properties in secondary and tertiary markets, appraisers generally need to dig to uncover data that will help them arrive at a market value for the subject. Here are three major techniques they use. Identify comparables. Scarce local data can result in the perception of a less-reliable valuation in the opinion of a lender or purchaser. Appraisers can overcome this issue by making the client or user of the valuation aware of the efort undertaken to f nd local data. When out-of-market data is used, the appraisal must clearly show how it is credible in the valuation. While there is ofen adequate data for smaller properties, the larger investment properties ofen require comparative sales data from outside the market. For example, we valued a new, single-tenant ofce building containing approximately 90,000 square feet, leased to a credit tenant for 10 years in a tertiary market. Te subject property was under contract at the time of our valuation. Based on the lack of local, comparable data, we used comparables in other small markets as well as a comparable in a larger market. Te larger-market comparable was also leased to a credit tenant for at least 10 years. Te comparable was similar in quality, but slightly superior in age. Te subject's net operating income on a per unit basis was slightly less than the comparable, the result of lower land costs and the older age of the improvements. Te subject's contract price was based on a 7.50 percent overall cap rate compared to 6.72 percent for the comparable. Te 78-bps spread is in line with survey information and broker opinions when comparing properties in larger markets to those in smaller markets. Gather local data from area experts. In small secondary and tertiary markets, it's crucial to interview brokers, owners, and even the tenants when possible. We recently valued a U.S. post ofce in a tertiary market with fve years remaining on its original lease term with some remaining renewal options. Our research found few recent rural post ofce comparables with similar remaining lease terms. Valuing complex properties in primary or large secondary markets is often easier than valuing simple properties in smaller markets. While considered secondary, many of these markets have seen increased demand for real estate, which has resulted in more leasing activity and sales transactions and thus more market information, benefting the valuation process. Small secondary and tertiary markets have fewer properties that are attractive to outside investors. While outside investors are showing increased interest in small secondary markets, the majority of the transactions involve local or regional investors. But size is not always a deciding factor for real estate investors. Tertiary markets in North Carolina, for example, generally have a countywide population of less than 150,000, with many having fewer than 100,000 residents. While these markets are small, they generally have some attractive retail, industrial, and ofce uses. When comparing market transactions, however, the diference in overall capitalization rates between properties in larger markets and tertiary markets may be minimal or nonexistent. For instance, a community shopping center in a North Carolina tertiary market sold in fourth quarter 2012 at an 8.35 percent overall cap rate to an outof-market buyer. According to the PwC survey at the 40 July | August | 2013 Commercial Investment Real Estate