Q&A with Noelle McDonald: What Goes into Selecting an Appropriate Cap Rate?

Q&A: What Goes into Selecting an Appropriate Cap Rate?

There is a lot of speculation that CRE is somewhat overvalued. Are there analytical limitations that would result in delays to using increasing capitalization rates in appraisals that we should be aware of?

Inherent in the appraisal process is the notion of data lag. The appraisal assignment typically calls for a current value as of particular date, but the data used to estimate the value typically lags behind this current data. For instance, a sales contract will be executed on a property and by the time the deal closes and is recorded by the local municipality, several months or more have passed. We can expect that the cap rates in recently closed/publicly recorded deals, may not be reflective of current market activity at all and coupled with a decreasing amount of sales activity and historically high interest rates renders this data a mere starting point for further necessary adjustments by appraisers.

How does a rapid rise in short & long-term interest rates (and a forecasted rise in rates) tie into cap rate conclusions?

Generally speaking, cap rates tend to move in conjunction with interest rates. This is primarily due to the increased cost of borrowing. The relationship between cap rate and interest rates are not directly correlated, however because the trajectory of the rise in cap rates is also tied to inflation and a borrower’s appetite for risk.

As a lender I’m interested in other methods than just comps to determine cap rates so I’m not surprised when the appraisal comes back. We know the historical comps are barely usable right now. Please refer to the Cap Rate Webinar slides. If you have any further questions, please don’t hesitate to reach out to LCS directly.

Which method is better in selecting a capitalization rate, band of investment technique, rates from local or regional sales data or national or regional investor surveys?

Please refer to the Cap Rate Webinar slides. If you have any further questions, please don’t hesitate to reach out to LCS directly.

Is 95% occupancy still considered stabilized to where an As-Stabilized value does not need to be requested in the Appraisal?

An As-Stabilized occupancy rate is determined by the market for that particular property type, and not a given number or rate. Theoretically, a property can be 95% and still be considered as not stabilized if the similar properties in the area are all 99% occupied. In most cases, an appraiser develops a proforma that assumes the property is at stabilized occupancy, calculates a cap rate that would apply to a stabilized property and derives an as-stabilized value, and deducts stabilization costs from the as-stabilized value indication to arrive at an as-is indication of value. Therefore, even if not requested, the appraiser has some idea of the as-stabilized indication.

About the Speaker

Noelle McDonald’s primary focus is to manage the overall operations of the LCS Valuation Services Department as well as general management of valuation employees working in conjunction with the COO, Regional Managers and SVPs of the Corporation to assure the success of LCS, Inc. Noelle also contributes to business development, establishing strategic plans and goals and leading staff to meet company objectives for growth and high quality client services.

Noelle’s expertise includes complex valuation and consulting assignments including: Acquisition/ Disposition, Litigation, Ad Valorem (tax protest), Estate Settlement, Condemnation, Going-Concern, Portfolio Management and Restricted-Use (internal decision making). Assignments completed for assets located throughout the Midwest, as well as nationally. Experience serving as a Appraisal Reviewer for a national bank (FIRREA compliance). Served on the federal level as a Underwriter for HUD.


For the full recording and slides from this webinar, reach out to Liz Mahoney, Director of Sales & Business Development today.