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1. 2009 | FALL EDITION | RICSAMERICAS.ORG
PROPERTY AN INFORMATION RESOURCE FOR
RICS MEMBERS AROUND THE GLOBE
ARE WE THERE YET?
COMMERCIAL REAL ESTATE’S
LONG ROAD TO RECOVERY.
MEXICO IN TIME OF CRISIS CANADA’S REAL ESTATE MARKETS TOWN PLANNING IN ITALY
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2. Contents
Contacts
Publishing and advertising
managed by:
RICS Americas
propertyworld@rics.org
5 Are We There Yet?
Editorial Board: Marc Louargand, FRICS
Tony Grant, FRICS
Simon Taylor, FRICS
Matt Bruck, RICS Americas
Managing Director 9 Toward Sustainable Finance:
Readers:
James Arrow, MRICS
The Trouble with Asset Values
Don Dorchester, FRICS Dennis Webb, FRICS
Maureen Ehrenberg, FRICS
Alistair Lamb, MRICS
Clive Lowe, FRICS
M. Barden Prisant, FRICS 12 Site Specific Art: Where Real Estate
Executive Editor:
Steve Wolfe, RICS Americas and the Art World Intersect
Director of Operations
Beverly Schreiber Jacoby, FRICS
Managing Editor:
Will Safer, RICS Americas
Communications Associate
Designed by: 15 Ten Principles for Sustainable
Aaron Mickelson
Printed by:
Property Underwriting & Valuation
Earth Enterprise Scott Muldavin, FRICS
Published by:
RICS Americas
60 East 42nd Street
Suite 2918 19 Canada’s Real Estate Markets
New York, NY 10165
T +1 212 847 7400 Sheila Botting, FRICS
www.ricsamericas.org
22 Mexico in Time of Crisis
Oscar J. Franck Terrazas, MRICS
25 The Challenge of Real Estate
Investment In Italy
Marzia Morena, MRICS
While every reasonable effort has been
made to ensure the accuracy of all
content in the journal, RICS will have no 27 The Value of Continuous
responsibility for any errors or omissions
in the content. The views expressed in the
journal are not necessarily those of RICS.
Program Assessment
RICS cannot accept any liability for any Alexia Nalewaik, MRICS
loss or damage suffered by any person as
a result of the content and the opinions
expressed in the journal, or by any person
acting or refraining to act as a result of
the material included in the journal.
29 Concern in the Caribbean:
All rights in the journal, including
copyright, content and design,
Strategies for Surviving
are owned by RICS, except
where otherwise described.
the Economic Crisis
Steve Rajpatty, MRICS
front cover
© Katja Wickert
RICS members receive
RICS Property World | Fall 2009 3
50% off job listings
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3. Enter the World
Economic Overview
of Caribbean Construction Are We There Yet?
Marc Louargand, FRICS, cautions that even while the rest of the economy appears to
CCD is the must-have trade journal for be recovering, the commercial real estate market will likely lag behind.
the global construction professional
Caribbean Construction Digest (CCD)
is a new trade journal geared towards
“redefining the built environment” within
the Caribbean. CCD provides news,
information, discussions and debates on
issues impacting on the Caribbean’s
unique construction industry, as well as
articles and interviews on people,
© Yanik Chauvin
programs and projects of importance
to various stakeholders.
CCD is a reliable source of Caribbean
construction highlights for the academic,
A
s we exit the middle of 2009 we are still countries are expected to have positive growth
contending with a global recession that has although at lower rates than in past years.
professional, investor and contractor.
had a negative impact on property markets.
The outlook for the near term is not better. Given In the United States, the signs are still mixed but
the lagging nature of property market responses many economists are calling for a positive GDP
change in the third or fourth quarter of 2009.
Articles by respected professionals
to the broader economy, things will probably
get worse before they get better. What will it There are a few positive signs in leading industries.
from around the world take for things to turn around? Where are we The Book-to-Bill Ratio in Semiconductors rose
going in terms of occupancies, rents and values? to .74 in May compared to .47 in January. The
Special reports and technical What forces will combine to shape the fortunes Book-to-Bill ratio compares current sales (Book)
information of the property market for the next few years? to shipments (Bill). When the ratio is at or above
1.0 it signifies a healthy electronics market. By
The Global Recession comparison, the May 2008 ratio was .86. Things
Comprehensive construction are improving but we still have some distance
news coverage We are still in a global recession that began to go. By contrast, the Book-to-Bill ratio in
at the end of 2007. The World Bank forecast Japan in May was .40. The OECD reports that
contemplates negative GDP change in OECD
Insight, in-depth data and countries of -4.2 percent with a negative 4.8
leading indicators for most economies pointed
industry analysis
up or signified a trough in May 2009. The
percent in non-OECD countries for the full year current recession has been more severe and
2009. Developing countries, which typically pervasive than the two previous ones. Job loss
Commentary, Interviews have relatively high GDP growth rates, are in the United States and elsewhere far exceeds
and much more! forecast to come in at only 1.2 percent in the experience of the last two downturns. In
2009. OECD countries are forecast to have a order to understand the reaction of the real
modest recovery in 2010 with GDP growth of estate market to the broader economy we
1.2 percent. Some of the world’s more robust need to focus on job loss and job creation.
economies have been hit hard. Korea recently
Let us be your guide to the raised its GDP forecast from -2 percent to -1.5 Jobs and the Recovery
world of Caribbean construction
percent. Singapore has released a -4 percent to
-6 percent GDP forecast and Brazil is forecast to Readers may recall talk of a “jobless recovery”
www.cariconstruction.com be -1.1 percent. Only India and China of the BRIC in the early 2000s. In fact, all recoveries are
Redefining the built environment
For subscriptions or advertising
please call 868 221 9366 or email RICS Property World | Fall 2009 5
sales@cariconstruction.com.
RICS-PWFall09.indd 4-5 11/5/09 2:43 PM

4. Economic Overview Economic Overview
simultaneously. Based on behavior by recent graduates, it also and dicing the paper into increasingly remote derivative claims.
appears that there will be a meaningful pent-up demand for Since the ultimate buyers of those claims were comforted by
apartment rentals that can only be unleashed by job creation. agency ratings that implied low risk, it appeared that a miracle
had occurred and that risk was banished from the marketplace.
The office sector has a modest over-capacity at present. Whether it Today the miracle of the disappearing risk has been debunked as
gets worse before it improves will be determined by firms’ ability just another illusion. The expression of risk is found in the spread
to retain their current staffing levels and remain viable. In the of required yields over Treasuries or Gilts or other putatively risk-
United States, credit markets appear to be turning back toward free instruments. Transaction data from the past two quarters
has begun to show a rise in both cap rates and spreads.
I expect that we will Cap Rates
again have a flat
During the recovery from the 2001 recession, which was
accompanied by a modest excess supply of real estate due to
economic contraction, Real Capital Analytics reports that the
bottom for an extended average cap rate for institutional transactions was 8.74 percent
during the period January 2001 to December 2005. During the
period as we enter a
same period the average 10 year Treasury rate was 4.43 percent.
The real estate cap rate spread averaged 430.7 basis points during
that time. Why were spreads so high? Why was the real estate risk
period of mixed results. premium nearly 100 percent of the Treasury yield? In the 1980s
real estate cap rates had negative spreads to Treasuries. Why?
Because investors assumed that the high inflation rates of the
a semblance of normalcy with the exception of the possibility of period would be reflected in increasing revenues and values if they
a CIT bankruptcy, which could have a major impact on several persisted. During the recovery from the 1990 recession, which was
industries that rely on factoring and franchise finance. Expect the accompanied by
market to remain weak for 18 to 24 months. Robust office markets a massive
typically require vacancies to fall below 14 percent in the United excess
States while several forecasters are estimating that vacancies will
Months to Recover Peak Emplyment Bureau of Labor Statistics; Saltash Partners LLC; Establishment Data be approaching 17 percent by year-end. Of course, in individual
markets the numbers vary widely with some moving into the mid-
Figure 1: Recent Post-Recession Employment Recovery 20s already. But these numbers tend to be in traditional growth
markets (with the exception of Detroit) that have shown the capacity
to grow jobs at 5 percent to 7 percent per year in recoveries. The U.K.
“jobless” as seen in figure 1, Recent Post-Recession Employment they anticipate. Even if so, it will take an extended period to make market looks to be in somewhat better shape in terms of the level of
Recovery. It took 48 months to regain peak employment in the progress back toward the peak employment we saw last in 2007. vacancy but the relative importance of financial services in the City
United States after the 2001 recession, until February of 2005. The I expect that we will again have a flat bottom for an extended and the West End could make for an extended recovery period.
percent of job loss in the current recession has been significantly period as we enter a period of mixed results. Some will be rehiring
sharper than it was in the 2001 recession, which bottomed at while others are still cutting. How does that affect real estate? The pieces are in place for a slow recovery in the jobs market,
97.9 percent of peak employment. As of June 2009, the United which means that real estate fundamentals will remain weak
States had fallen to 95.3 percent of peak employment. It took There did not appear to be any significant capacity shortages in for an extended period and will embark on a slow recovery
four years to replace those jobs in the 2001 recession; it will likely the property markets during the last expansion (with the possible when the job market begins to rise off its bottom.
take much longer to recover this time. What does it mean for exception of hedge fund office space in Greenwich, Conn.).
Thus, the property recovery will follow the jobs recovery. For now, How have the decline in fundamentals and changes in
property markets? Figure 1 shows that the previous employment
the office market remains weak in the United States, United the capital markets combined to affect values? The two
recoveries follow a trend upward from a trough after “bumping
Kingdom and elsewhere with rising vacancies and declining critical variables are risk premia and leverage ratios.
along the bottom” for an extended period, about ten months
in both cases. This recession is significantly different in both rents. Retail occupancies are suffering as well as retailers go dark
Return of Risk
the extent and the speed of job loss in the United States. in marginal locations or shut down entirely. Regional and super-
regional malls are harder hit than in previous downturns while Risk premia have returned to asset pricing. During the
Will the recovery resemble past history or not? Employment smaller shopping centers suffer as well. Given consumers’ new recent bubble, buyers made little distinction between the
contraction is far more widespread this time around and that propensity to save in the face of asset deflation and reduced bluest of blue chip properties and those in historically
may be something of a silver lining. Traditionally, firms take circumstances, retail will likely take substantial time to come back. volatile and risky markets. Why was that? Some would
advantage of a recession to trim costs, remove deadwood and argue that it was because the investor was not bearing
delay rehiring in the recovery as long as possible in order to Multi-family properties have seen increased weakness but on
any risk. The lenders were taking it all. Yet the lenders’
a relative basis their fundamentals remain better than other © Photon75
restore their balance sheets. Given the sharp reduction in jobs, it rates did not reflect meaningful risk premia either. A
is possible that firms will find they have a capacity problem early property types. Multi-family will also enjoy the earliest firming of
cynic might note that the originating lenders were
on in the recovery and that they must begin rehiring sooner than fundamentals as job creation brings household formation almost
not bearing any risk either since they were slicing
6 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 7
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5. Economic Overview Sustainability—Finance
Toward Sustainable Finance:
supply of finished product, cap rates traded between 9 percent Rising Cap Rate Scenario
and 10 percent. Why? Because the specter of inflation had
been banished by then. Investors priced property to reflect We have already seen a few transactions with markedly higher
its inherent risk, returning to a spread roughly equal to the cap rates. They are likely to remain high if not go higher if space
The Trouble with Asset Values
Treasury rate. From early 1992 to the end of 2000, Treasuries market fundamentals remain weak and inflation remains dormant.
traded between 5 percent and 6 percent. During 1998, Treasury Since we are in a balance sheet recession, it’s likely that deflationary
rates pulled back into the 4 percent range and cap rates forces will remain at work in the short run. If so, we should expect
followed, dipping into the 8 percent range — but bounced some continued decline in values as cap rates adjust upward to a
back into the nines when Treasuries returned to the 5 percent new equilibrium in the 8 percent to 10 percent range. Realize that Dennis Webb, FRICS, argues for applying concepts of long-term sustainability to financial processes—essentially
range in 1999. The failure of Long Term Capital and the the cap rate adjustment is occurring while fundamentals weaken telling the truth about value—as short-term asset valuation models continue to feed economic turmoil.
and leverage declines — or disappears altogether in some sectors
or markets. The combination is likely to bring value declines on
It could take as many the order of 40 percent or more. Based on the institutional return
indices in the United States and the United Kingdom, it appears
as five years to regain
that value declines on the order of 40 percent are a reasonable
expectation and in fact have been booked in the case of publicly
traded real estate securities. Coincidentally, a shift from a 6
the jobs lost to date. percent cap rate to 10 percent delivers a 40 percent decline in
value for a constant income stream. While transaction volume
has remained scant, the implications are clear for value. In the
Asian crisis created a flight to the safety of Treasuries and real case of open-ended funds that are required to revalue quarterly,
estate benefited as a result. But rates came back up in 1999 and already we see more than 30 percent declines in the past year.
remained in the same range until 2002 when the Federal Reserve
began its fight against the specter of deflation. Cap rates fell along While fundamentals will continue to weaken for some time,
with Treasuries as liquidity flooded the world’s capital markets. The the shift in cap rates will create most of the revaluation.
inevitable end to the property pricing bubble has come, evidenced
© J Freeman
Which will it be?
first by a dramatic drop in transaction volume as investors avoided
creating a reportable value against portfolios of higher book It likely will be both. Persistent high cap rates for a period of at
values. Transactions have begun to come back, perhaps driven least 12 to 24 months, followed by cap rates falling on a relative
by foreclosures or liquidations in pursuit of delivering. Recent cap basis to Treasuries. The initial phase of recovery will see few if any
S
rates have returned to the 9 percent and even the 10 percent level jobs created, thus investors will lack confidence that they will be ustainability as a concept is routinely applied create healthy perceptions of value in a big
according to Real Capital Analytics. Where will they go next? able to fill empty space in the short run so they will rely on in-place to the natural world but routinely ignored way. The bad news is that adoption of anything
revenue and be subject to reduced leverage opportunities. At some with respect to the financial environment. A that has tried to get in the way of what had
There appear to be two possible paths for cap rates and
point, however, the massive liquidity created by stimulus packages large portion of the population has developed been a very profitable false reality was wholly
pricing in the next two to five years. What could drive them
around the world will escape the liquidity trap and inflation will an awareness of conservation principles and resisted by existing institutions. The speed with
back down and what could sustain them at elevated rates?
come roaring back. Monetary policy response will lead to higher at least some respect for nature but financial which a clearly unstable system has imploded
Falling Cap Rate Scenario reference rates from central bank actions or from investor pricing. beliefs are so embedded in our thinking that has been surprising, but so has the extent of
we regard them as given, and have allowed global cooperation and the proliferation of
A return of expectations for high inflation accompanied by It could take as many as five years to regain the jobs lost to date. institutions to develop based on (what are now new ideas. I am quite optimistic over the long
improving fundamentals in space markets could combine to lower But expectations of a recovery will allow investors to look forward obviously) unsustainable premises. The oceans term, since there may now be an opening for
cap rates dramatically on a relative basis. Recall that property traded to better cash flows. Investors have shown in previous cycles that are rising slowly but financial consequences are new understanding and a collective interest in
at negative spreads to Treasuries during the high inflation years. they are willing to pay a small premium to have their assets in descending upon us at a frightening rate. telling the truth. There is hope for Capitalism II.
We had reasonably sound fundamentals in most space markets portfolio when good times return. So after a period of persistently
during those years so investors had a reasonable expectation of high cap rates investors will come back into the market in sufficient The root of both aspects of sustainability is Wages of conventional wisdom
being able to raise revenues along with inflation. But remember volume to put downward pressure on cap rates and force them to short-term thinking. Our short-term notions of
price inflation into their expectations rather than into the cap rate. asset value have fostered unreal perceptions Short-term notions of value have become
that the nominal cap rates were low during that period only by
of individual wealth and growth, and enabled embedded in our conventional wisdom, to
contrast to the very high risk-free rates that failed to completely
In each cycle, animal spirits rise to deny its very existence. Perhaps enormous financial distortions. Short-term the point that our collective belief system
reflect expected inflation. Will the Treasuries and Exchequers of
some memory of the current trauma will remain to inform our thinking creates a historic myopia and a kind regarding asset value has moved into a sort
•
the world have the discipline to head off incipient inflation from
decisions during the coming recovery. of vacuum in which greed can have a field of fanciful parallel universe. This collective
massive liquidity infusions? If we see a Japanese-style policy emerge
day. Most recently, otherwise stable assets fantasy has fostered unreal perceptions of
with long-lived low reference rates, we may see falling cap rates
were allowed to enable extremely unstable individual wealth; one unfortunate, immediate
again. Another enabler of falling cap rates was enjoyed in the Dr. Marc Louargand, FRICS, CRE
derivative securities, with (by now) well-known consequence of which is the pain of foreclosure
previous cycle — low interest rates accompanied by high loan- Principal
implications for global financial markets. now being experienced by a great many
to-value ratios. A 90 percent LTV at 5 percent interest means a 6 Saltash Partners LLC borrowers worldwide. The full measure of its
percent cap rate yields 15 percent to the equity. The likelihood of Saltashpartners.com The good news is that we do have institutional consequences is far greater than foreclosures,
this arrangement obtaining in the foreseeable future appears dim. marc@saltashpartners.com financial structures that can be adapted to however, as our collective sense of loss has
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6. Sustainability—Finance Sustainability—Finance
For example: What if a lender had made a single-family mortgage an institutional structure for countering the destabilizing effects of
loan in 2005 based on a two-value appraisal? Say short-term frothy property markets. Its methods are an approximation for getting
conditions support a current market value of $650,000, but also that at a long-term value, and have apparently worked quite well. MLV is
this value demonstrates a divergence from the long-term trendline now included as part of International Valuation Standard 2, but has
based on property type and market area, and another value was apparently not been adopted by any other countries or institutions.
concluded at $400,000. The lender is now faced with a much more
firm underwriting basis than with the $650,000 value alone. There Expanding the role of asset-level valuation
are actually two collateral assets, one valued at $400,000 and one
Existing risk-management tools are divorced to a large degree
at $650,000 — $400,000 = $250,000 (hardly a small difference).
from the underlying assets, making broad assumptions about
A long-term loan can reasonably rely on the $400,000 value, and
growth rates (6-8 percent into perpetuity?!), which have been
its expected long-term growth rate. Of course, the growth rate
known by valuers to be absurd. The problem is that apparently no
could change, and the value could again be subject to short-term
one (on Wall Street) thought to ask, confirming that conventional
conditions at any future date. Nonetheless, the long-term based
wisdom has been driving their myopic risk analyses. Recognition
value would present less risk of loss than the short-term (current)
of MLV, or some other standard that parses short- and long-term
value. The $250,000 difference between the two is clearly a riskier
perspectives, would provide a much more secure reliable foundation
Year component of current asset value, and could be underwritten as such.
for the higher-level tools used by institutional risk analysts.
Figure 1: U.S. Inflation-Adjusted Home Prices What about the reverse situation? What is an appropriate price
The current MLV standard makes a substantial effort to achieve long-
reference when the market is temporarily depressed? What if the
term values for income-producing properties, adjusting cap rates,
long-term value is $400,000, but the market will only pay $280,000,
rent levels etc., but so far appears to be less effective with respect to
become enormous. Perceptions that were outrageously optimistic conditions, asset values can indeed be used to underpin long- due to oversupply or any number of other current, short-term
single-family and other owner-occupied and non-income-producing
have turned depressingly pessimistic, and what might have been term loans and investment, and these observations would argue conditions? The $120,000 below-trend value is also due to short-
types. However, valuation technologies have continued to advance
experienced as a normal return to a relative stable, long-term trend, for high ratings in their associated credit derivative instruments. term conditions. The lower value is meaningless in the long-term,
since the standard was established and they could be brought to
is instead being viewed with much hand-wringing and grief. but does reflect an impaired ability to sell now. A recovery to
The short term is another story, as short term pricing is highly bear on the issue by the valuation profession. Such an analysis of
$400,000 will occur at some point, although its timing is uncertain.
Were individuals really richer, or was the experience guaranteed vulnerable to unexpected events. Unsustainable capital market the effect of time on value is currently in use for many property and
The market may even fail entirely (as for certain types of bank-held
to be fleeting? Did stable assets really become unstable? Were conditions and (local) natural disasters, to name just two, can ownership conditions. Examples include highly developed statistical
derivative securities). It’s the ability of the holder to wait that gives
the foundations of risk analysis realistic and appropriate? Much cause short-term pricing behavior to diverge considerably from methods (for examining and tracking broad markets), real estate
the assets value under these conditions. This is not so different from
of the blame for the collapse of the fanciful parallel universe the underlying long-term trend. Is short-term pricing a suitable damages (which demonstrate recovery to normal pricing levels
various commonly-observed impairments, attributable to ownership
is aimed at the entirely unexpected, widespread/systemic benchmark for long-term decisions? It still may be, so long as any over time), marketability impairments (risk of a forced hold) and
(undivided interests held by two or more parties, for example), or
nature of the decline in property values. However, a closer deviation from the long-term trend is identified and understood. The other methods. Valuers have the tools to parse between short- and
physical impairments (such as toxic contamination). Impairments
examination of asset pricing reveals that we have not been outsized risk exposure comes when deviations are not understood; long- term conditions, and deliver value opinions based on these
are generally cured over time, with the property trading at less than
telling ourselves the truth, and that a decline was inevitable. when short-term “frothy” pricing is used as evidence of market value premises. Of course, developing uniform methods and training
its “stabilized” or long-term value during the impairment period.
for long-term decisions. The reverse problem arises when prices (of programs will take some doing; but is there really an alternative?
What is it with asset prices, anyway? property or derivative paper) are depressed, or when markets fail, It would make sense for valuers to go beyond their current/traditional
Conclusions
impairing the short-term market value of collateral. In either case, policing function, and parse their opinion into short- and long-term
Real Property assets are among the most stable and least volatile
the consequences of poorly understood asset values are not trivial. components. It does no good for valuers to bail out of opining The notion of financial stability should, by now, be ready for prime
fixed assets over the long term, normally exhibiting a reasonably
on such issues, on the basis that they should not be involved in time. The question is… Are we really committed to adopting a
consistent historic trend over time. Even at present, a portion of Are valuers actually helpful? underwriting decisions. Valuers are the ones in a position to analyze long-term mindset? If so, someone needs to attend to the long-
a property’s value is, indeed, quite stable; its long-term value is
and understand what is and is not a stable and reliable value. This is term value trends if we are to a) substantially reduce the effects of
reasonable predictable, and not strongly subject to unexpected What happened to the checks built into the property finance
not a simple undertaking, to be sure, but an essential step toward unexpected events, b) provide some counterbalance to the positive
events. However, another portion is more directly affected by system? One such check involves market-value appraisals. Did
establishing popular and institutional awareness of sustainable value. feedback system which encourages both ever-escalating asset
short-term (unsustainable) conditions, which can conspire to inflate banks and investors rely on appraisals? If so, did they help, hurt,
or deflate value well beyond an expected range, and exposure to or do anything useful at all? Appraisals are generally intended to values on the one hand, and the collective malaise and liquidity
The Germans are convinced
unexpected events can become great. When this happens on a make sure that the collateral has sufficient value to support the impairments that depress values. If not the valuer (who has been
wide scale—when short-term and long-term value components are loan, but the market value premise is only a snapshot in time. The Just such a method for appraising commercial property under generally marginalized into the role of policeman), then who? Who
conflated and confused—a bubble or depression can begin to feed appraisal typically considers property, its local environment and conditions approximating the long-term was established in 1996 by really understands the assets? If we want to build a sustainable
on itself. A positive feedback loop amplifies the value trend in both capital market conditions with reference to other (comparable) German Pfandbrief mortgage banks for collateral used with highly financial system, we may have less fun when bubbles begin to
directions. Property owners experience themselves as unreasonably transactions and current investor (or home buyer) behavior. This rated covered bonds. Under this system, valuers provide opinions soar but will endure far less grief when they come back to earth.
rich or poor, and derivative securities that are designed to rely on is largely a policing function, where a neutral party (valuer/ of “Mortgage Lending Value” (MLV), defined as: “The mortgage Continuing our historic myopia will not serve the sustainability
property’s fundamental stability can become severely impaired. appraiser) offers an opinion of value that may or may not match value of a property is the value that can be expected with a high level needs that the future demands. I do believe that what will serve
the transaction price. But assuming the transaction is consistent of surety, derived from the historic perspective of market events at us long term, as an achievable and maybe even transformational
Unexpected events do not typically affect the long-term trend,
as suggested by Robert Schiller’s inflation-adjusted home price
with others… what if the entire market has been moved by the time of the valuation, on the basis of the durable characteristics, goal, is widespread understanding of the truth about value. •
external conditions, such as easy money, lax lending standards, and and which will be achieved in normal property transactions over a
index, shown in the chart for the postwar period. The aggregate Dennis A. Webb, ASA, MAI, FRICS
other short-term conditions that have big pricing effects. What long period in the future.” The mortgage banks using this system of
U.S. data shows that long-term values have been reasonably Primus Valuations
good does it do the long-term lender to know that a transaction valuation may lend over the threshold allowed by a property’s MLV,
stable; further, local market values for all property types normally Primusval.com
price matches a market skewed by short-term conditions? but the excess cannot be used as security for covered bonds. Thus, a
follow cycles that are reasonably well understood. Under such dwebb@primusval.com
two-tier risk/cost structure for loans, which is exactly appropriate as
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7. Art & Real Estate Art & Real Estate
Site Specific Art: Where Real
sales of similar properties are sought from appropriate markets prices on the secondary market for resale are very limited and
where transactions involving similar items occur with regularity. prices are comparatively modest. However, the particulars of
this commission made it a unique engagement and inspired the
When it comes to site-specific art however, depending upon artists to undertake other projects on a monumental scale.
Estate and the Art World Intersect
the purpose of the valuation, it might be appropriate, indeed
necessary, to consider also the Cost Approach. Value would be Site-specific commissions promote the possibility of working on
based upon the cost of duplicating or re-creating an identical a hitherto unimagined scale, adapting and transferring work
piece. When the method of construction or materials used is to different media, and enabling artists to reach large, new
Beverly Schreiber Jacoby, FRICS, explains why site specific art must be valued not replicable, the artist is alive, approves and is willing to re-make an audiences on a daily basis. For example, another notable new MTA
identical piece, the Cost Approach method should be considered. commission is Sol LeWitt’s work at the 59th Street-Columbus Circle
only by its intrinsic qualities but on the merits of the location.
Artists who specialize in large-scale and site-specific works may subway station. Entitled MTA Whirls and Twirls, the mural will
not enjoy robust secondary markets if their practice consists consist of ribbons of color ceramic tiles traversing the entire south
of permanent installations that may take months and years to wall (floor to ceiling) of the Intermediate Mezzanine Landing at the
complete. As a result, there may be few appropriate comparables. transfer point between the IND and IRT Lines. Additionally, there
will be two porcelain tile floors entitled Compass (57th Street) and
Actually, the artist may not need to be alive for originals to be Compass (58th Street) on 57th and 58th Street mezzanines. The
re-fabricated. Sol LeWitt (American, 1928-2007), the conceptual project is scheduled to be installed in 2009. Sandra Bloodworth,
artist who stressed the idea behind his work over its execution, Director, Arts for Transit (MTA), noted that MTA commissions “are
died in 2007, but during his lifetime his wall drawings were diverse in every way while upholding the goal of speaking to the
executed by trained studio assistants. One of the motivating riding public. From emerging artists to very well-established artists,
factors surrounding the long-term retrospective of LeWitt’s work in such as Roy Lichtenstein (42nd Street Station), the works are valued
Adams, Mass., at Mass MoCA was the explicit intention that the accordingly.” The MTA self-insures, but its art is covered separately.
large exhibition would facilitate the training of a new generation
of executants to carry on with his practice. During medieval During the 1980s when New York City was a less safe and friendly
and Renaissance times, when masters belonged to guilds and town, when there were few public art or other opportunities for
academies, it was understood that the studio would continue to young artists to work on a monumental scale, Keith Haring (1958-
work from the master’s models after his death. Therefore, the 1990) discovered that tarps, fences and walls worked as handy
approach of LeWitt’s studio is not much of a departure from supports for large scale paintings. In 1987 he executed a joyous and
centuries-old practices. For an artist of such renown, with a high-spirited mural on a cinderblock wall in a children’s community
decades-long roster of public and private sales, researching center gymnasium on Pitt Street (Acrylic paint on cinderblock wall;
price point data combined with estimating time and labor costs 20 x 20 feet; 6.10 x 6.10 m). “The Lower East Side Boys Club
“MTA Whirls and Twirls” Compass (57th Street) and Compass (58th Street) (2009) Sol LeWitt, 59th Street-Columbus Circle, A, B, C, D, 1 lines, MTA New York City Transit. would enable one to arrive at a strong basis for valuation. Mural” was one of eleven public murals Haring executed during the
Commissioned and owned by Metropolitan Transportation Authority Arts for Transit. 1980s in New York and around the world. The successful “rescue”
Infrastructure, transportation and official projects in the United and removal of the intact, undamaged mural from the Lower East
States often include commissioned, new public art work through Side Boys Club by professional riggers, conservators and gallerists
I
f the real estate world operates according when valuing the work, but there are many “Percent for Art” legislation and policies. For example, New York before the Pitt Street building was demolished in 2008 was widely
to the truism “location, location, location,” factors to consider. The valuation process begins City’s Metropolitan Transit Authority (MTA) has applied a portion heralded in the media. Authenticated and supported by the Keith
the same motto does not necessarily apply with questions such as: Is the work of art an of its Capital Program funds to commission permanent works Haring Estate and Foundation, “The Lower East Side Boys Club
in the art world. This insight informs one of element of the structure or is it an independent of art as part of the rehabilitation of subway and commuter rail Mural” can be installed as a self-standing or structural wall and
the key distinctions between valuing real and object? Is it possible for the work to exist and stations. Projects up to $20 million dollars budget one (1) percent; is ready to be transported world-wide, protected in a steel-casing.
personal property. Exceptional circumstances retain its value in a different location? Can projects greater than $20 million dollars spend one-half (½) As Stuart Alan Levy, a private art dealer in New York, observed, “If
apart, buildings and structures do not typically professionally removing it be accomplished percent. Tunnels, escalators and disability access components are an object is structurally sound, can be appreciated as a work of
move; personal property, by definition, is without damage? How does the site or structure excluded from the formulae. Key to successful designs are sturdy art, and can be relocated to an appropriate alternate venue, there
movable. At the intersection of these two contribute to the value of the object? Would the materials, such as mosaic, tile, or glass, as well as low maintenance shouldn’t be any loss of value because it is moved. It could end
kinds of property is site-specific art. object lose value if removed from its site? Might costs and imagery pertinent to the location. A year ago MTA arts up in a location even more prestigious than it was originally.”
it gain value, particularly if it becomes accessible managers initiated a pro-active program that calls for twice yearly
The term, “site-specific” is, ironically, not to more viewers elsewhere? And, finally, does inspections and condition reports on more than 200 pieces installed Levy, a member of the Fund for Park Avenue Sculpture Committee,
specific enough for a careful discussion. It the work impact the value of the real estate? throughout the system to identify and prioritize maintenance issues. which partners with the New York City Parks Public Art Program, is
describes everything from new, commissioned familiar with site-specific pieces from participating on a committee
work designed for a specific space initiated The next step in valuing these works is to Mega projects, such as the new $530 million dollar new South of citizens with art-related expertise that organizes temporary
at the early planning stages, to a piece determine the method of valuation. When Ferry Terminal in lower Manhattan to replace the old one damaged installations of sculptures along the Park Avenue malls, or medians.
acquired for a pre-existing or contemplated valuing fine art for donation, estate, gift, on 9/11, are showcases for new art. The terminal boasts floor- As with the MTA, it is imperative that materials are able to
site. It can embellish, enhance or even disguise financial or insurance purposes, it is customary to-ceiling glass walls silhouetted by the outlines of trees titled withstand New York’s seasons. Size is also a constraint; sculptures
architectural details or structural imperfections. to use the Comparative Market Data approach. “See it Split, See it Change” by Doug and Mike Starn (American, need to be at least fifteen feet tall to be visible during the milder
Value is based upon past prices for similar 1955- ). Paid $1 million dollars for the four-year project, the weather when the trees on the malls are leafy. While the committee
The relationship between the work and the works by the same artist, or similar works by artists acknowledged they lost money if labor and time were handles paperwork associated with permits and approvals from
structure to which it is attached affects the art another artist of equal standing and related included. Experimenting with the properties of fused glass with various New York City bureaus and covers liability, other costs
work’s value and, therefore, is a consideration reputation. Current and recent comparable their German fabricator took a year. The Starn twins’ auction
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