Rethinking commercial property valuation processes as markets shift

Adopting a thoughtful commercial property valuation process is essential to manage complexities and build investor confidence.

The second installment in a series on organizational shifts within the commercial real estate industry.

In brief

• Today, traditional valuation methods risk obsolescence; real estate investment managers may need to innovate to meet investors’ focus on forward-looking projections.
• Balancing in-house knowledge with external insights is crucial; a hybrid approach to valuation can unlock efficiency and enhance accuracy.
• As investor expectations evolve, transparency and frequent communication of valuation practices are no longer optional — they’re essential for growth.

Today’s business environment is increasingly global, costly and complex. In response, real estate investment managers are looking to evolve into more agile, insight-driven and efficient organizations. One organizational area ripe for advancement and innovation is the real estate valuation function.

Constrained commercial property valuation model

Personnel resources represent another challenge in evolving the real estate valuation function. Demand for specialized expertise is in direct conflict with the need to control fund manager and fund-level expenses. Further, within real estate platforms, those responsible for producing valuations often wear multiple hats.

Given cost pressure and bandwidth challenges, real estate valuations are often performed by multiple teams, within and outside of the organization. The multi-party model highlights the need for governance and collaboration in a process reliant on external and internal teams.

Rethinking the commercial property valuation function

Given market and bandwidth pressures, it’s essential for real estate players to rethink their valuation functions. Real estate investment managers that want to grow and compete for the best capital must embrace new ways of performing real estate valuations. Innovation is needed to meet the accuracy, frequency and transparency now demanded by investors, and alternative models and emerging technologies must be leveraged to achieve lower cost. 

On the valuation front, real estate firms need to balance “doing more with less.”

Several key factors when evaluating commercial property valuation processes:

1. Frequency:

Assess the appropriate frequency of valuations based on investor requirements and market dynamics. While some open-ended funds and non-traded REITs may benefit from more frequent updates, other investment vehicles, such as closed-end funds, may find that less frequent valuations are sufficient.

2. Balance between insourcing and outsourcing:

Evaluate capacity to manage valuations internally vs. leveraging external expertise. Many real estate investment managers utilize external appraisers at some point in their valuation processes but maintain a valuation oversight function in-house for ad hoc analyses and third-party oversight. When internal resources are stretched, leveraging external providers can enhance operational efficiency. Some players have opted to moving a portion or all of this oversight to an outside firm, or to an offshore center for cost enhancement.

3. Process enhancement:

Explore integrating advanced analytics and technologies to improve accuracy and timeliness. Real estate valuation professionals are inherently challenged by the integration of data from multiple sources. Investment in data integration, visualization and automation can aid, offering multiple benefits: improved identification of valuation inconsistencies and anomalies, auto-generated valuation results and assumptions for investors, and AI-enhanced portfolio performance insights. Additionally, real estate firms are leveraging workflow management tools customized for the real estate valuation process. These tools are used to track source documents for valuations, as well as internal reviews and sign-offs.

4. Investor engagement:

Consider how often and what information to communicate to investors regarding investment valuations. In the current environment, transparency is essential; however, this needs to be balanced against providing data that is overwhelming, confusing and extraneous. Real estate investment managers should consider how their valuation practices can facilitate proactive engagement, which is essential for attracting and retaining capital.

There is no standard model, or “one size fits all” answer when it comes to an optimal real estate valuation model. Firms must align their valuation process to their growth objectives and carefully weigh considerations around their people, process and technology in making potential changes. By aligning their valuation practices with the needs of their investors and the specific requirements of their fund structures, real estate investment managers can better navigate the complexities of the market and enhance their competitive advantage.

Kevin Hanrahan, EY-Parthenon Transactions and Corporate Finance Executive Director, also contributed to the development of this article.