Unique Valuation Model Required for Mixed-Use Asset Success

Mixed-use properties are drawing considerable interest by investors in the multifamily and commercial spaces. Walkable communities and transit oriented development are creating new opportunities for not only developers but renters and business owners as well. Partners at Goulston & Storrs, one of the largest retail real estate law firms in the U.S., say mixed-use assets are on the rise in report by Forbes. New developments are springing up combining residential with retail, office, medical and other spaces in large urban areas. "Mega development" towers that blend luxury, conventional or affordable living spaces with local retail that includes high-end restaurants and theaters are dotting Los Angeles, New York, Washington, D.C., and other metropolises. Residents can live, shop and dine without leaving home with desirable ground-floor retail and office space anchoring high-rise apartments.

Valuation practices are challenging real estate’s newest trend

The Urban Land Institute and National Association of Realtors are devoting plenty of space to what’s becoming a widely popular investment option but say with it comes a lot of questions. Ideas vary on how to effectively execute a mixed-use development from finance to development to lease to operation. Unlike residential or commercial developments, mixed-use projects in high-density or suburban settings are sometimes difficult to finance and have a lot of check-boxes to determine whether they are profitable or will fail. One of the biggest challenges is that valuation practices haven’t always advanced with the asset strategy, says RealPage Senior Vice President Damien Georges. In a recent article published by PERE, Georges said a single valuation won’t capture the true worth of all the spaces under one roof. “In this new world of mixed uses and co-working, institutional owners must grapple with the problem of valuing different cash flow streams in different ways, based on how a property is being used,” he said in the article. “Unfortunately, one size does not fit all when it comes to valuing a mixed-use asset.” “This is why the majority of valuation analysis for mixed-use portfolios currently occurs in Microsoft Excel.”

Mixed-use space and usage must be factored into valuation

Georges said a common mistake by small and large investors alike is not taking into consideration the actual usage of each space while trying to assign a single valuation methodology based on the property type. An incorrect valuation will affect the dynamics of the lease, which ultimately determines cash flow and investment return on the balance sheet. That’s just the tipping point. The wrong valuation can have a cascading impact on cap rates as well as benchmarking against competitors. Ultimately, the estimation can shake the foundation of the development. “This could lead to incorrect assessments of asset manager performance by owners and investors,” Georges said.

Data-fueled valuation software can make the right assessment

The answer is transaction data models that are used for determining asset valuations within a portfolio. Property management software tailored for asset evaluation enables the investor or user to accurately identify the type of space associated with a lease. Without the proper transaction history, the chances of implementing a successful strategy for mixed-use development are slim to none, Georges said. “Managers should look for service providers with a history of developing data management and portfolio management solutions for complicated investment managers.” To read more details, see the full article here.