Appraisers are increasingly incorporating trend analysis when valuing real estate. Property owners, as well as potential buyers, need to understand the role trend analysis (also known as market analysis) can play when determining value.
Trend analysis in a nutshell
Which amenities and characteristics attract tenants or potential buyers to a property — or, conversely, turn them off? Real estate appraisers know that something as simple as, say, the side of the street a property is located on or a development’s proximity to public transportation can have a dramatic impact on its value. The desirability of “hot” features, such as health club amenities, green building certification or smart technologies, may vary over time — especially as macroeconomic conditions ebb and flow.
Trend analysis is a quantitative technique appraisers use to identify and measure trends in the marketplace. Using spreadsheets and software tools, appraisers can sort through large sets of comparable data and find relationships between sales price and 1) market conditions and 2) property-specific characteristics that drive value. These trends can be used to predict future performance or support value adjustments for market conditions. Trend analysis is especially useful when minimal sales data on highly comparable properties is available but a broad database of properties with less similar properties can be tapped.
The Appraisal Institute (AI) calls market analysis a “critical step” in the appraisal process, particularly when it comes to the property’s highest and best use. According to the AI, market analysis should consider market participants’ beliefs about what will happen to market conditions in the future as well as current and expected changes in supply and demand.
Sampling of relevant factors
The AI is careful to distinguish between factors that cause change and symptoms of change. The latter include changes in vacancy rates, falling or rising property prices or sales prices exceeding list prices.
Change-causing factors may be capital-based or user-based. Capital-based factors may be related to changes in monetary policy, government spending, taxation and interest rates and an overabundance of investment capital producing increased competition. User-based factors relate to changes in migration patterns, population shifts, economic shocks, technological developments, natural disasters, overbuilding and changes in affluence and income distribution.
Regardless of the factors analyzed, appraisers should segment the market to better reflect the subject property. Trends for a specific neighborhood are likely to be more helpful than broader market trends.
While trend analysis is a critical part of an accurate valuation, remember that the resulting value is an estimate as of a particular date. As the AI warns, trends, like other factors that affect value, can change subsequent to the valuation date, changing future value along with them.