I recently took on the assignment on behalf of one of my clients of estimating the current market value of several high profile land parcels being held for future development. In the past, prior to entering the most recent recessionary cycle this would not have presented itself as such a challenging task.
There have been very few and in some cases zero sales comps over the last two years and is land is valued using the “Market Value-Comparable Approach”.
The market approach to value is determined by comparing the subject property to similar properties which have been sold or offered for sale. Adjustments are made for differences in date of sale, size, location, surrounding development, available infrastructure, highest and best use, development restrictions, local tax policies, and other physical characteristics. The adjusted values of those sales considered most comparable (based on physical characteristics and market conditions) establish a range of values for the subject property.
So the question is how realistic in terms of comparable value are sales that occurred during the peak of the market prior to the downturn and at what percentage should these historical values be discounted to establish current value? What about current asking prices and factors of potential distressed sales transactions. Today there is even a larger delta in current asking prices for comparable properties in many areas as compared to 3 or 4 years ago.
The lack of comparable sales and the impact of distressed sales are issues appraisers and brokers are having a tough time with today. What is market value? Ultimately, market value is the highest price in an open competitive market a purchaser is willing to pay. In today’s market given where we have been over the last 24 months the only way to get a true relative understanding is to put the property on the open market and test the waters.
So how far off are land values from the historical peak? In a huge major market like Houston this could vary drastically from as little as 10% in some areas to as much as 50% in others. Currently without activity it is very difficult to pinpoint, speculative development is at a stand-still and the only buyers in the marketplace are a few end users and land speculators seeking opportunities at steep discounts which typically represent values at the opposite ends of the spectrum.
Today’s the process of placing value on commercial land has become more of an art and less of a science and until demand picks up and more true comparable sales take place, pricing commercial land will require considerably more diligence to establish an accurate value.