Arpit Gupta - The State of Commercial Real Estate

The commercial real estate market is experiencing one of its most complex valuation periods in recent memory. As assessors, we're tasked with finding fair market value in a landscape where traditional benchmarks are shifting beneath our feet. A recent conversation with NYU Stern finance professor Arpit Gupta offers valuable perspective on the forces reshaping property values, and why our work has never been more critical.

The Interest Rate Reality Check

For years, we've operated in an environment of historically low interest rates. That era has ended, and the implications for property valuation are profound. As Gupta explains, "When we think about valuation in general, we think about that value changing either because cash flows are impacted or because discount rates are affected."

This isn't abstract theory, it's the daily reality we face in mass appraisal. The user cost framework that underlies much of our residential valuation work depends heavily on mortgage rates. When the cost of borrowing jumps from 3% to 7%, the equilibrium between renting and owning shifts dramatically. Yet property sales, our primary source of market evidence, have slowed to a crawl.

The challenge? We're trying to mark properties to market when the market itself has become illiquid. Transaction volumes are down, but that doesn't mean values haven't changed. It means we need to be more thoughtful about how we interpret limited sales data.

The Remote Work Wild Card

Perhaps no factor has introduced more uncertainty into commercial property valuation than the shift to remote work. Office properties, once the bedrock of stable commercial assessments, now face fundamental questions about their future utility.

Gupta notes an intriguing paradox: while hybrid work has become common, it may represent an unstable equilibrium. "Hybrid work gets some of the benefits of remote work, but not really most of them," he observes. Companies save modestly on space, but employees still need to live within commuting distance. The real disruption comes when firms go fully remote, tapping national labor markets and eliminating office costs entirely.

For assessors, this presents a unique challenge. How do we value an office building when its highest and best use might be changing before our eyes? The answer isn't to chase every market sentiment, but to ground our valuations in actual market evidence while acknowledging the uncertainty in our estimates.

The Productivity Puzzle

One of the most sobering insights from our discussion concerns construction productivity. Despite technological advances, real estate construction "has been the lowest or one of the lowest among all sectors going back several decades" in productivity growth. This stagnation affects new construction costs, a key input in our cost approach valuations.

The fragmented nature of the construction industry, combined with varying local regulations, creates a challenging environment for productivity improvements. As Gupta notes, "You typically have a very fragmented marketplace when it comes to real estate construction... regulations both in terms of zoning and planning."

This matters for assessment because replacement cost new, a fundamental component of the cost approach, may be increasing faster than general inflation. When productivity lags, construction costs rise, potentially creating disparities between cost-based and sales-based valuations.

The Frozen Residential Market

Perhaps nowhere is the valuation challenge more acute than in residential properties. Homeowners who locked in sub-3% mortgages have little incentive to sell. As Gupta puts it, "If you're one of these people, and there's a lot of these people out there, you're basically never going to move again because why would you move?"

This creates what he calls "almost like a nationwide Prop 13", properties effectively locked in place by favorable financing. For assessors, this means fewer sales comparables and potentially widening gaps between market participants. New buyers face 7% rates while existing owners enjoy 2.5% rates, creating vastly different economic realities for similar properties.

Finding Our North Star

In times of market uncertainty, our role as assessors becomes even more critical. We're not just calculating values, we're maintaining public trust in a system that funds essential services. This requires us to be both technically rigorous and transparent about the challenges we face.

The current environment demands that we:

• Acknowledge when markets are thin and comparables are scarce
• Document our reasoning when traditional approaches yield conflicting results
• Communicate uncertainty without undermining confidence in our assessments
• Remain focused on fairness and uniformity, even when precision is elusive

Key Takeaways

The Big Picture: Interest rate changes have fundamentally altered property economics, but market illiquidity is masking the full impact. Assessors must look beyond transaction volume to understand true market conditions.

The Practical Impact: Traditional valuation approaches may yield increasingly divergent results. When the cost, income, and sales comparison approaches disagree, documenting our reconciliation process becomes critical.

The Professional Response: This is not the time for false precision. Acknowledging uncertainty while maintaining rigorous methodology builds more credibility than pretending market chaos doesn't exist. Our communities depend on us to be both accurate and honest about the limitations of our accuracy.

In periods of market stability, our work can feel routine. Today's environment reminds us why professional judgment, not just technical skill, defines excellent assessment practice. The market will eventually find its new equilibrium. Until then, we serve our communities best by being thoughtful interpreters of an uncertain landscape.