Inventory Valuation Methods

Call it the perfect storm 🌀. 🔥 It’s not because of tariffs (yet), but home insurance premiums have increased by 14% 😰 over the past year… on top of several years of double digit increases. 💰 In Southwest Florida, they’re expected to quadruple over the next few years… and are weighing on home value growth which has turned negative 📉. ⚖️ And there’s a small but growing cohort of homes for which property taxes + insurance is now **more** than the mortgage payment itself. Financial markets aren’t the only thing underwater this week ⛈️ . Communities across the Kentucky River watershed are just starting to clean up after days of record flooding. Like communities in Los Angeles, Tampa Bay, and Asheville over the past few months — recovery will start soon enough. In the most favorable of economic environments, rebuilding after disasters is costly. Even more so right now. Construction materials and labor costs tend to surge in the months immediately following natural disasters. 2/3 of the construction laborers who rebuilt New Orleans in the year after Hurricane Katrina were immigrant workers 👷. 🔶🔶 Many homebuilding materials are currently exempt from the latest round of tariffs: Will they be a permanent carve out from the emerging new trade order? Equally important: Will the construction labor even be around? 🔶🔶 Home price appreciation is slowing due to high long-term interest rates, but owner maintenance costs are rising too — and potentially property taxes on top of that as state and local governments seek to offset lost revenue from reduced federal transfers. 🔶🔶 The real estate market could quickly find itself in a unique situation where property taxes, insurance and maintenance costs are rising faster than values — a real decline in real estate prices even if nominal price gains remain in positive territory.🔶🔶 Few experts are as thoughtful on property insurance as the team at Moody’s. Their recent podcast (from mid March) on how property insurance markets are adjusting to new wildfire and flood risks is especially timely right this week. Listen here 👇   - Moody's: https://lnkd.in/g-iB3tkn - Spotify: https://lnkd.in/gb2qUqde - Apple: https://lnkd.in/g_pfcRZy #economy #realestate #LIPostingDayApril

🕰️ It’s time to evaluate the Long-Term Debt Cycle and Its Impact on CRE (Ray Dalio) Dalio believes that we are currently at the brink of a period of "Great Disorder" within the long-term debt cycle. He suggests that we are entering the late stage of the cycle, where economic, political, and social tensions are escalating due to high levels of debt, economic inequality, and geopolitical conflicts. According to Dalio, these conditions are reminiscent of past cycles that have led to significant disruptions and changes in economic and political systems. This stage is characterized by increasing instability, which could result in a major economic downturn or a shift in the global order. - - - For #CRE investors, this means that rising debt costs, economic instability, and changing asset values could be on the horizon. Understanding this cycle could be the key to navigating the coming challenges in the CRE market. Here’s why the long-term debt cycle matters now more than ever. 1️⃣ Rising Interest Rates (We’re through this phase, for now) As the debt cycle peaks, central banks may raise interest rates to combat inflation. • Higher rates increase the cost of debt for CRE investors. • Refinancing existing properties becomes more expensive. • New investments may yield lower returns due to higher borrowing costs. This will squeeze profit margins, making debt management crucial. 2️⃣ Economic Slowdowns A downturn in the cycle often leads to a broader economic slowdown. • Reduced business activity decreases demand for commercial spaces. • Vacancy rates rise, impacting rental income. • Investors may struggle to maintain cash flow. Understanding market timing can help mitigate these risks. 3️⃣ Declining Asset Valuations Economic instability can lead to falling property values. • Investor confidence may drop, reducing demand for CRE. • Credit availability could tighten, further depressing prices. • Properties may lose value, impacting your portfolio’s equity. The long-term debt cycle is a critical factor in CRE investing. Understanding where we are in the cycle can help you navigate upcoming challenges and seize opportunities. ❓How are you preparing your CRE strategy for the next phase of the debt cycle? #CommercialRealEstate #RealEstate #Investing

Let’s talk about the current economic climate and it’s effect on Commercial Real Estate: The market gets excited whenever there’s a hint that interest rates might drop, which makes people spend more and drives up prices. This can create a problem because then the people in charge might need to keep interest rates higher for longer to prevent prices from rising too much. It’s like a seesaw: when one side goes down, the other goes up. This can lead to problems like a weaker economy and trouble for banks, making it harder for people to borrow money. What risks does the commercial real estate sector face in an environment of prolonged higher interest rates? Firstly, higher borrowing costs can increase the financial burden on property owners and developers, potentially leading to reduced investment in new projects and slower growth in the sector. Secondly, rising interest rates may dampen demand for commercial properties as businesses face higher financing costs for expansion or relocation, resulting in decreased occupancy rates and lower rental income. Additionally, existing commercial real estate loans with variable interest rates may become more expensive to service, increasing the risk of default for borrowers and potentially leading to higher rates of loan delinquency and foreclosure. Overall, prolonged higher interest rates can weaken the profitability and stability of the commercial real estate market, posing challenges for investors, developers, and lenders alike.

🔍 My new paper: when house prices increase, people don’t buy smaller houses - they borrow more! Mortgages (and loan-to-income ratios) of buyers have increased even faster than house prices - see the attached figure 🏠💸 That’s extremely fast! With Gabriel Ahlfeldt and Jagdish Tripathy we’ve just published a working paper (link in comments) that explains this. Key Findings: • Housing-Consumption Channel: As house prices rise, people borrow more to maintain their lifestyle, showing that housing and non-housing consumption are not easily substitutable. • Elasticity of Mortgage Borrowing: A 1% increase in house prices results in a 0.82% increase in mortgage borrowing. • Impact Over Time: Without this borrowing trend, mortgage growth would have been 50% lower and house price increases 31% less since the 1990s. Implications: • Macroeconomic Stability: The surge in borrowing amplifies the effects of economic cycles, potentially leading to greater economic volatility. • Financial Stability: Higher loan-to-income ratios increase the risk of defaults, posing a threat to the stability of the financial system. • Policy Considerations: Policymakers need to consider measures to mitigate the risks associated with high household debt levels created by increasing house prices. Please share the link/paper/post and let me know if you have comments or suggestions - we’d be very grateful for any feedback! #HousingMarket #MortgageTrends #FinancialStability #Macroeconomy #PolicyMaking #Economics

Most people overcomplicate real estate, but the truth is, that 80% of market shifts boil down to just 3 factors. Here’s what the industry doesn’t always tell you: 1. Economic Conditions: The pulse of the economy is crucial. GDP growth, employment, and urban incomes directly impact housing demand. 2. Supply-Demand Dynamics: The chronic housing shortage, especially in premium segments, creates price pressure. Tracking new launches and government schemes like PMAY helps in staying ahead of inventory imbalances. 3. Interest Rate Shifts: The RBI's monetary policy significantly influences affordability. Even a 1% change in home loan rates can make or break a deal. By keeping a pulse on these 3 drivers, I'm able to navigate the ups and downs of the Indian real estate landscape. Of course, there are other influences like demographics and regulations, but these are the core factors I watch most closely as a seasoned industry veteran. What factor according to you affect the real estate market? #indianrealestate #housingmarket

"The Fed sets the pace, but the market writes the rules." This highlights the dynamic where the Federal Reserve controls short-term rates, but it's market forces and investor sentiment that shape longer-term borrowing costs, ultimately driving the broader financial landscape. It underscores the limits of central bank influence when faced with the complexities of market reactions. While rate cuts generally stimulate economic activity, rising long-term Treasury yields could neutralize some of those benefits, particularly for commercial real estate. With trillions in debt maturities coming due in the next few years, higher long-term rates are driving up refinancing costs, squeezing property values and slowing down new investments. These headwinds are significant in an industry heavily reliant on debt financing. As yields rise, commercial real estate investors will need to face these challenges head-on and adjust strategies to stay competitive in a tightening financial environment. Peachtree Group Peachtree Group Credit Jared Schlosser Michael Ritz Brian Waldman Daniel Siegel Michael Harper Brent LeBlanc Sam Goldfarb John Madziyire, CFA #higherforlonger #commercialrealestate #federalfundrates https://lnkd.in/gY_WrFVD

𝗗𝗲𝘁𝗲𝗿𝗺𝗶𝗻𝗶𝗻𝗴 𝘁𝗵𝗲 𝗣𝘂𝗿𝗰𝗵𝗮𝘀𝗲 𝗣𝗿𝗶𝗰𝗲 – 𝗗𝗖𝗙 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 How do we determine the right purchase price for a commercial property with a targeted return in mind? By using the 𝗗𝗶𝘀𝗰𝗼𝘂𝗻𝘁𝗲𝗱 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 (𝗗𝗖𝗙) 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀. When using this method, the DCF model should be built out to the desired investment timeline, then we can calculate the maximum price we should pay for the property using the cash flow from operations plus the reversion value. 𝘌𝘹𝘢𝘮𝘱𝘭𝘦: We want to purchase a 50,000 square foot industrial building. The property is listed without a price, but the offering memorandum provides income information. The building is currently leased at $2.25/SF triple net, with the tenant reimbursing for all operating expenses. The annual increases are set a 3.0%. We built out a 10-year model and estimated what the property would sell for at the end of the hold period. Now we have our unlevered cash flow which is just the cash flow from operations and the net reversion value. If we know that we want at least an 8.00% return (discount rate) from this investment. We can use the NPV formula in excel to calculate the appropriate purchase price. The formula is NPV(8.00%,YR 1 Unlevered CF:YR 10 Unlevered CF) = $20,972,250. This is the maximum amount we can pay for the property and hit the 8.00% targeted return. We can check this with the IRR function in excel by including the -$20,972,250 as the initial cash outflow, followed by the cash inflows from property operations and the sale. We can also check the math with the present value formula PV = CFt/(1+r)^t. The sum of these discounted cash flows equates to the purchase price. Understanding this method will help ensure you don’t overpay for an asset, while staying aligned with your investment goals.  If you like this type of content, please drop a like, follow, or comment! I post about CRE finance, valuation, and financial modeling weekly.

According to the Green Street Commercial Property Price Index, commercial real estate valuations are down 19% from its peak in 2022 when the Federal Reserve started hiking interest rates to the highest level in more than two decades. Rising borrowing costs caused real estate valuations to plunge, with many buyers and sellers disagreeing over exactly what many properties were worth, thus freezing the property market since then. Now that the Federal Reserve has begun cutting rates for the first time in four years, sellers and buyers have begun to get some clarity on where valuations stand. The commercial-property market is starting to come back to life, in part because lenders and owners want to cut their losses and make new investments.

Consumer spending accounts for nearly 70% of US economic activity and serves as a leading indicator of broader macroeconomic trends. Most of us in CRE have seen firsthand how shifts in consumer behavior send ripples across the industry landscape. To help navigate the latest waves, this article examines how evolving consumer behavior—particularly in the context of tariffs, inflation and wage shifts—affects various commercial real estate asset classes. This report provides insights into: - The correlation between discretionary spending and retail property performance - The link between e-commerce growth and industrial logistics demand - The influence of income trends on multifamily housing stability - The role of consumer confidence in hospitality asset performance Understanding these connections is critical for making informed investment and lending decisions, particularly in a period of heightened economic uncertainty. At AVANA Companies, we integrate these consumer trends into our underwriting process to ensure resilience and adaptability across our lending portfolio. I invite you to review the report for a detailed analysis of how consumer behavior informs risk and opportunity in the CRE market. #CommercialRealEstate #Tariffs #Inflation #PrivateCredit #RealEstateLending #CRE