The appraisal industry appears to be just another loser in the aftermath of the deep real estate recession that plagued the country in the late 1980s and early 1990s. But, on closer examination, the industry is evolving away from basic appraisal methodology into ancillary ventures that will hopefully keep businesses profitable until the next real estate boom.
There is no doubt, the recession coupled with the changing regulatory environment has played havoc with the industry. First, the 1989 Financial Institutions Reform, Recovery and Enforcement Act, better known as FIRREA, tightened appraisals to such an extent they became a burden to financial institutions. Subsequent legislative changes in a sense were fraught with overreaction, taking the appraisal process out of control of property owners and putting it into the hands of lenders, who began using less detailed forms of appraisal. Further legislation created the phenomena of state licensing, which some appraisers regard as a de facto "dumbing down" of the industry.
State licensing redirected the real estate community toward the least common denominator by allowing "people without a particular competency" to function validly as professional appraisers, says Terry Tener, partner and director of appraisal services for Koeppel Tener Real Estate Services in New York. "State licensing supported volume appraisal at the lowest common denominator."
Since the licensing requirement given at the state level was easier than former industry tests, the market was flooded with new appraisers attracted by the vast amount of federal work brought on by the recession. Appraisals were needed on the billions of dollars worth of property and loans subsequently taken over by the likes of the Federal Deposit Insurance Corp. or the Resolution Trust Corp.
That work has all but disappeared, leaving a lot of appraisers with little work and probably no job.
"Fees have gone down substantially basically because of the increase in competition and the requirements of the banks which don't need appraisals as frequently as they used to," observes Brad Weiman, a senior vice president with Joseph Farber & Co. in Denver. "There are more people out there appraising and there are fewer appraisal assignments on the banking end of the business, which until a year ago was the majority of the business for most appraisers across the country."
Shakeout has yet to happen
This has all led to rumors of a shakeout in the industry. But talk is cheap, as are recent appraisals, and there is little indication of company failures or mergers of necessity.
"I've heard rumors of companies folding their tents," says Ray Cirz, a partner in Krauser, Welsh & Cirz Inc., a large appraisal firm based in Morristown, N.J. "You keep hearing about things, but I can't think of anyone who has left the business."
This doesn't mean it won't happen in 1995, but most appraisal companies managed to limp through 1994 intact.
One thing that has happened, however, has been a bifurcation of the industry. There are now two separate disciplines, with the two growing farther apart or moving closer together depending on one's perspective.
The appraisal business per se is an objective discipline that seeks to find the estimated value of real estate. On the other hand, property tax consulting is a subjective, advocacy business where practitioners are trying to insure minimum values on properties for the benefit of clients. Some big appraisal companies do both, but there are property tax specialists, who would rather not be lumped in with their appraisal brethren -- not only because the business is different but because property tax consulting is an expanding discipline while appraisal work is withering.
"The appraisal industry is controlled by the economics of real estate. On the other hand, the property tax industry is protected somewhat by the dynamics of real estate valuation," explains Marvin Poer, president of the Dallas-based company that bears his name. "When the value of real estate goes up or down, the taxing authorities follow and assessments go up or down. That demands the attention of property tax consultants who try to protect correct valuations."
This isn't to say property tax consulting isn't under its own pressures, some of which are similar to those plaguing the appraisal industry. "During the real estate boom there were a lot of people that jumped into the property tax business, many of which were not qualified to do this work," Poer says. Now everyone is bidding for the same work. "Property owners have found that they could go out and shop fees. The fees are very competitive."
Poer recently acquired Boudreaux Harkness Inc. of Houston. "As America's property and sales tax environments become increasingly complex, more specialized expertise and advanced technology are needed to ensure maximum tax liabilities for our clients," says Poer. "I believe we will see more consolidations in our industry as a result of this trend."
Competition is coming into the industry because this is where business appears to be heading. Investors always have been careful of their tax assessments since property taxes are frequently the most expensive part of on-going property management. More and more, however, corporations such as DuPont and Eastman Kodak are scrutinizing their tax assessments since property taxes are often the second highest operating expense a corporation generally has, after debt service.
"Companies are looking at venues that are being overvalued and seeking some relief from taxes, from tax assessors. This makes up the majority of my work," says Joyce Greenwood, a senior vice president with Easley, McCaleb & Associates in Atlanta. "A lot of oil companies and manufacturers are beginning to look closer at their taxes as jurisdictions are trying to give homeowners a break and shift the burden to commercial."
Real Estate Tax Services in Dallas boasts three divisions, including one that specializes in sales and use taxes, another that performs appraisals for government bodies (non ad valorem-related), but its fastest growing division is property tax consulting. Lee Hodges, chairman of the company, says everything from major manufacturers to cement plants are looking at reassessments, and he predicts there will probably be a boom when the utility industry deregulates.
Industries undergoing dramatic changes can benefit the most from property tax reassessments. For example, sulphur producers have been hurt because the price of sulphur has been plunging. Those kinds of economic shifts affect the value of assets.
Cushman & Wakefield's Valuation Advisory Services division, formerly the appraisal services group, has been branching out during the past two years, first in January 1993 creating a unit that specialized in property tax consulting, and then easing away even more in 1994, from just traditional appraisal services into valuation services, such as transactional due diligence, portfolio reviews, litigation support, as well as disposition and acquisition support.
The firm's property tax assessments saw a 100% increase in business in 1994, according to Frank Liantonio, executive managing director of the division. He cites competition driving fees downward and the FIRREA modifications as two reasons why gross revenues from its basic appraisal services business are 5% to 10% down from last year.
As Poer notes, in regions of the country where real estate is flat, property tax consulting is flat as well. But over the past few years where the value of real estate has plummeted, local governments often need to be prodded to reduce individual assessments. By the same token in local economies where real estate prices are escalating, governments are quick to start raising assessments and external brakes often need to be applied.
Municipalities, REITs spur reassessments
The true indication of the property tax consulting business is not necessarily that real estate comes back or doesn't come back, but how government officials assess properties, explains Bill Quinn, president of Property Tax Specialists in Silver Spring, Md. "If their assessments are not a good reflection of today's market values, that is our business."
Quinn speculates that a lot of real estate investment trust business could be heading in the direction of property tax consultants. As he sees it, REITs, having raised a lot of money on Wall Street, went on a purchasing spree with the eventual result of bidding up prices. "It's possible the local governments could latch onto those prices as an indication of market value for everyone -- a lot of properties will be overassessed."
REITs and the debt securitizations known as commercial mortgage-backed securities (CMBS) have also brought a lot of business to some of the larger appraisal firms, especially those that have been wise enough to form close relationships with Wall Street investment bankers.
Joseph J. Blake & Associates Inc., which has 10 offices across the country, found Wall Street's securitization craze a boon to its business. It is even doing a lot of work for some of the national funds that have also come back into the market.
For organizations like the REITs, which are spending a lot of capital on acquisitions, Joseph Blake is performing appraisals, but there is a lot of non-traditional work as well.
"REITs are not interested in having the properties in their portfolios valued, because they don't want the public aware," explains Don Blake, vice president at Blake headquarters in Woodbury, N.Y., "but they do need market studies prepared."
Appraisal firms had become a little complacent in the last several years, says Douglas Brown, president of the Appraisal Institute in Chicago, having grown accustomed to the banking and mortgage banking work. However, now that the refinancings have slowed down to a trickle and the RTC is winding down, "many appraisers are looking around for other things they can do."
New York-based Landauer also has forged ties to Wall Street, working with investment houses, rating agencies and investors in securitized debt.
James Kafes, a managing director with Landauer, estimates that back in 1990, appraising was 80% of his division's business. Today, it's about 60% to 65%, and Kafes says he's working to get it down into the 50% range. "Today, there is a lot more consulting and pure analytical work and less appraising."
Krauser Welsh & Cirz is on the same track. Cirz estimates that five years ago, appraisals were 80% of his company's business, now it's no more than 50%.
"At a time when the industry is being flooded by new appraisers, there is really less business out there, and the business there is not as demanding as it was before," Cirz says. "We are swamped because we have changed our direction of work, doing a lot more consulting." For example, Krauser Welsh is representing a number of foreign and domestic institutions in the acquisitions process, performing, among other jobs, due diligence reports.
As Kafes concludes: "Everybody feels the old glory days of appraising will not return soon, so everyone is looking to trade on the fundamental strengths that they think they have in analyzing and understanding real estate and deriving fundamental products from the understanding and expertise. We are all looking to create products."