Earlier this month, Partner Valuation Advisors added Michael Wahl as a managing director in its New York City office. Wahl brings more than a decade of experience to the firm and has appraised roughly $5 billion worth of commercial property in more than 40 states. Connect CRE sounded Wahl out for insights on what he’s seeing in the current market and what investors—and sellers—should be mindful of. 

Q: In New York City, the Department of Finance recently reported a 6% year-over-year increase in total property values (including residential and utilities). Conversely, data from Green Street and MSCI Real Capital Analytics continue to show that commercial property pricing is declining. Are sellers often basing their asking prices on a misunderstanding of what current values are? 

A: Sellers are basing their list prices on market data from previous years. As I discuss later, given the changing environment and specifically interest rates, only the most recent cap rate and sale data is really relevant. As more transactions take place, we would expect the delta between list price and the final sale price to close as value post interest rate increases become more clear to sellers. 

Q: When it comes to valuations, what do you see ahead in 2023? In particular, what are some factors affecting valuations that people may not be aware of? 

A: While traditionally in appraisal we go back 12, 18 and 24 months for sales comps and cap rate data, with rising interest rates in 2022 it is more important than ever that data is as recent as possible. It is tough to say that sales and cap rate data more than six months old are relevant. More and more lenders will start to demand a focus on the most recent data. Freddie Mac guidelines are now requiring current comparable listings in the sales approach on top of closed sales that are traditionally presented. 

In the NYC market, the most obvious is cap rate expansion given the pressure of rising interest rates. We expect to see cap rates rise in 2023 throughout the market. Vacancy for multifamily will most likely remain low and stable in 2023 as there is still high demand for apartments, although it doesn’t appear we will see the same strong rent growth that persisted through 2021 and 2022. 

A: What are some watchwords this year for investors on the one hand and sellers on the other? 

For both, specific to NYC multifamily, keep an eye on the legislation regarding potential  rent stabilization law changes and status of the 421a, the tax exemption for new construction that expired in June 2022.  

In early February, a federal appeals court rejected a challenge to New York’s rent stabilization law (which was expanded in 2019). At the same time, the data shows nearly 10% of rent stabilized units in the city are sitting vacant by choice. Given the high demand for housing in NYC there will be continued pressure on both landlords and politicians to sort this out. Legislation in favor or against these landlords could potentially have a major impact on value for these assets. 

Gov. Hochul’s recent budget release proposed extending the construction deadline for the 421a for another four years. Currently the deadline to complete construction is June 2026. That being said, a new version of the program was not presented in the most recent budget. Without a new version of the program, it is likely that construction of new multifamily properties will slow and land values continue to fall as a result. 

Q: What strategies are you advising clients to follow in 2023? Have these evolved since the beginning of 2022, when the outlook was quite different? 

A: More than ever, utilize your appraiser. We are uniquely positioned between buyer, sellers, brokers, and lenders and constantly have access to the evolving data. Call the appraiser you have a personal relationship with and ask them what they are seeing, who they’ve spoken to and to pull comps. That hasn’t changed since the beginning of 2022, but is more important than ever, given the evolving situation. 

My other feedback, as discussed earlier, is to put the most emphasis on the most recent (past six months) data. Cap rate data from a year ago is most likely not relevant to the current market.