When commercial real estate markets turn volatile, traditional appraisal methods can struggle to keep pace. Cost, sales comparison and income approaches remain fundamental, but when prices move fast—especially in distressed markets—those tools alone may not provide a full picture of value.
At such times, Jeffery Fisher, professor emeritus at Indiana University and visiting professor at Johns Hopkins University, says the industry needs additional context. Writing at Nareit, Fisher suggests using what he calls Valuation Support Indicators or VSIs, to help appraisers, underwriters, investors, developers and owners "reconcile the three traditional indicators with a market-based rationale for selecting a defensible point estimate within the range each approach establishes."
Fisher describes five indicators that can offer meaningful market-based guidance when conditions are unstable.
The public market indicator examines implied capitalization rates within relevant REIT sectors. To calculate it, the appraiser divides the estimated portfolio net operating income by the enterprise value and compares the result to the cap rate used in a traditional appraisal. If the REIT-implied rate is higher, it suggests public investors are valuing real estate lower, potentially prompting a downward adjustment to the traditional conclusion.
The marketing time indicator relies on data from listing services, broker reports and transaction databases. If current marketing periods are significantly longer than historical averages, that extended timeline signals softer demand, driving the valuation toward the lower end of the range.
With the bid-ask spread indicator, appraisers collect bid-ask data from broker surveys, comparisons of listing and sale prices and direct interviews with market participants. A widening spread implies sellers are offering more concessions to close deals, again steering valuations lower.
The transaction volume indicator compares current sales activity to a baseline, such as a trailing five-year average by property type and market. When volume falls below a benchmark—say, below 60% of the baseline—it can serve as another signal to lean toward the lower end of traditional value estimates.
Finally, the AVM/AI/ML divergence indicator uses automated valuation models, artificial intelligence tools or machine learning outputs to cross-check results from conventional approaches. If these technological valuations come in "materially lower," Fisher notes, they may reflect emerging market signals not yet captured in standard appraisals.
Fisher emphasizes that these additional measures are meant to complement—not replace—the established appraisal framework.
"The VSIs address related but distinct aspects of market dislocation and should be considered together when informing where within the range the appraiser should select a value," he wrote.
By combining these indicators with traditional approaches, market participants can build more defensible and reality-tested valuations even in the most uncertain times.
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