Indulge me - stabilized value

[Ken B]

So...how and/or who decides what is considered stable for a specific property?

The appraiser asserts the stabilized occupancy based upon a comparison of the property to market standards.

 

[CANative]

Yes.

It's an opinion about the condition of the market specific to the type of property under appraisal. Stabilized occupancy for a Class B office building in say, Etiwanda, California is about 90%. Right now the property is 60% occupied. That means there is 30% excess vacancy.

 

[Lost Cause]

Ambiguous

I agree that the as stabilized value can be current (requires hypothetical) or prospective (requires extraordinary assumption).

That means there is 30% excess vacancy.

"Excess Vacancy"? That's a new term to me.

 

[Ken B]

Yes.

It's an opinion about the condition of the market specific to the type of property under appraisal. Stabilized occupancy for a Class B office building in say, Etiwanda, California is about 90%. Right now the property is 60% occupied. That means there is 30% excess vacancy.

And? Are you saying that market standard occupancy is 90% and the subject is at 60%? Why is the subject underperforming the market?

 

[Doug DeMars]

I figured it was a judgment call...made by the appraiser. In SF, it doesn't appear unusual to see 100% occupancy for many classes of properties in many areas. However, if the location isn't just right...the building is dated...etc...the "market standard" is not being reached.

I would assume that the appraiser makes some commentary as to why their opinion of what is "stable" for a specific property is less than (or greater than) the market standard. An educated guess based upon experience and market research...with commentary on the rationale?

 

[CANative]

Ken... Isn't "excess vacancy" the difference between the current, non-stabilized level of occupancy and stabilized occupancy. The average excess vacancy per period is half the sum of the beginning excess vacancy and the ending excess vacancy. This assumes that the space is absorbed uniformly during the period. The average excess vacancy is used to estimate the rental loss.

 

[Ken B]

I figured it was a judgment call...made by the appraiser. In SF, it doesn't appear unusual to see 100% occupancy for many classes of properties in many areas. However, if the location isn't just right...the building is dated...etc...the "market standard" is not being reached.

I would assume that the appraiser makes some commentary as to why their opinion of what is "stable" for a specific property is less than (or greater than) the market standard. An educated guess based upon experience and market research...with commentary on the rationale?

Not a guess...an assertion.

A property may be 100% occupied at a specific point in time, but that does not mean it would 100% occupied for analytical purposes. Perhaps if there is a credit-rated tenant in place and a 20-year remaining lease term, it might be analyzed as if 100% occupied.

If a market area is, in fact, 100% occupied at a specific point in time, what should be happening in the market?

 

[Ken B]

Ken... Isn't "excess vacancy" the difference between the current, non-stabilized level of occupancy and stabilized occupancy. The average excess vacancy per period is half the sum of the beginning excess vacancy and the ending excess vacancy. This assumes that the space is absorbed uniformly during the period. The average excess vacancy is used to estimate the rental loss.

"Excess vacancy" is not a term I am familiar with, but that doesn't mean that others would not be familiar with it.

But yes, if a property is not operating at stabilized occupancy, the appraiser should estimate the absorption period required the reach stabilized occupancy. Absorption may or may not be straight-line and may or may not begin immediately.

 

[CANative]

I agree Ken. I was just "asserting" that "excess vacancy" was not a term I made up. "Excess vacancy" versus "normal vacancy." :laugh:

A property in stabilized condition has reached the level of utility for which it was designed. For
income-producing property this generally means stabilized occupancy. Stabilized occupancy is a
level of occupancy that is expected to continue over the remaining economic life of the property.
A property reaches stabilized occupancy when the vacancy rate has reached a state of equilibrium
—that is, when the vacancy rate is not expected to increase or decrease dramatically over the
foreseeable future. Typically, stabilized occupancy reflects the investor’s anticipated rent loss
due to average market vacancy and tenant turnover. This is sometimes called "normal vacancy."
A lower level of occupancy resulting from conditions of supply and demand or other transitory
factors is not stabilized occupancy. Situations associated with a non-stabilized occupancy level
may include new construction prior to initial lease-up, significant loss of tenants in a soft or
overbuilt market, and properties undergoing significant renovations.

 

[Ken B]

Your statement assumes a property has no functional defects. Which leads back to my question regarding substantial differences in occupancy for a subject compared to the market. Why? Is there a problem with the property?

Or is the entire market operating below stabilized occupancy due to external factors? Are those factors likely to resolve themselves? Or did the single industry town lose its industry? In which case, are historical occupancy levels an indication of stabilized occupancy going forward?