Real estate assets and virtual valuations in the age of coronavirus
Unlike our colleagues who sit behind a desk evaluating paper assets like software licenses and private loan agreements or intangible assets like goodwill, professionals who value real property are used to rolling up their sleeves and hopping on the next plane.
Commercial real estate (CRE) valuation professionals visit properties to measure square footage and loading bays. Their machinery and equipment (M&E) counterparts visit refineries and factory floors, to inspect machines, review hard-copy usage records, and talk with the individuals who operate and maintain them.
But for the time being at least, that hands-on approach is going to have to change. Even if we could get to the sites with the travel restrictions and taboos brought about by the coronavirus, the facilities might be temporarily shuttered or we might not exactly be welcomed as warmly as we usually are. It’s unfortunate, because these visits can be extremely useful, especially in situations where there is a long file of historical valuations and restatements of book values that needs to be sorted out to pass muster with auditors in order to get a deal done.
The challenge is surmountable. It’s just going to require a bit more time and creativity than before.
Commercial real estate: Technology and owner input
One incredibly helpful tool for CRE valuation pros is right at our fingertips — Google Earth. The quality satellite images and tools from Google Earth are incredibly useful for everything from estimating square footage, to evaluating the neighborhood, to verifying approximate construction dates. And Google’s Street View is the perfect complement. Technology has also provided us with better access to municipal property assessment records. In addition to many municipalities making these records available online, the quality and details have improved dramatically over the years, including the addition of high-quality images.
These technology tools complement our standard practices of distributing property questionnaires and requesting photos from the current owner to cross-reference our online findings. We also rely on building owners and property managers for maintenance and capital improvement costs to get better insight on building condition and the quality of the maintenance program. All of these inputs and data, when combined with information from comparable property sales, are used to create an accurate mosaic picture of the value of a property that we are comfortable standing behind, without physically setting foot in the building.
M&E: Taking time to get it right
In M&E practices, we may need to lean a little harder on clients to help us compile maintenance logs, reconstruct fixed asset records, chase down the foreman to get a question answered or go down to the shop floor and see whether that 1971 coal powered furnace that’s on the books is really still there. All of that might take a bit more time, but because we are all on the same team — most of the work we do is associated with calculating purchase price allocations in the context of M&A deals — we will get through it together.
The creativity part will likely involve greater use of technological tools, some of which we were already making extensive use of such as digital photos, and others we are taking another look at such as live virtual video inspections (“Hang on, can you please pan back to that compressor to your left…”) and possibly even drones or robotics.
We’ll also continue to employ proven concepts like modeling common units in the retail or restaurant industry. It’s a safe bet that a 6,000-square-foot family-style chain restaurant that opened in Columbus, Ohio, in 1998 is in comparable condition to one that opened in Dayton in 1997, so there’s usually no need to visit them both.
Impacting every corner of our lives
The impact of the pandemic is going to be felt in every corner of our lives, including the valuation of real assets. We’re confident, however, that with a little creativity and a lot of partnership with clients, valuation professionals can continue delivering the sound, high-quality valuation work the market has come to expect from us.
Daniel Brunow is a senior vice president in the Real Estate practice, and Nathan Emanuel and Joseph Mickle are vice-president and managing director, respectively, in the Machinery & Equipment practice at Valuation Research Corporation.