The cost approach requires an estimation of depreciation and obsolescence and a way to value the land that the building sits on. Depreciation refers to the physical aging of the property. Obsolescence accounts for trends and market conditions that erode the property’s desirability, such as an outdated building design or an increase in neighborhood crime.

The market approach is limited to past sales that require adjustments to reflect such factors, beyond timing, as any difference in the desirability of a location or the physical condition of a sale property relative to the appraised property.

Meanwhile, the income approach requires the appraiser to make assumptions on a property’s future income stream. Appraisers will typically consider market rents and, for property like hotels that operate as a business, historic income and expenses.

The pandemic made these various assumptions much more speculative due to uncertainty over the future use of office space. Even a property’s location as an influence on real estate value is no longer straightforward. My research points to shifting perspectives on what is deemed a quality location, with real estate premiums associated with central business districts becoming dubious as more people work remotely.

Experts also disagree over which aspects of real estate to include in a valuation. Real estate that generates income has components beyond the actual land and improvements to it. Elements that contribute to generating income but are not “real property” – things such as furnishings and a hotel’s brand recognition – need to be stripped out of the valuation for some purposes.

Valuations for tax purposes generally focus on real property value, while valuations for lenders tend to include more of these other real estate components.

Consider hotels as an example. It is generally accepted that the hotel’s brand and its furniture, fixtures and equipment are not real property, yet they have big implications for its value.

Commercial real estate does not offer the transparent pricing structure built into some assets like stocks.

Real estate is less frequently traded and sales go through a number of intermediaries, and much of the information surrounding a sale is not publicly shared. As a result, buyers do not have an easy benchmark for price comparison – it is like trying to decipher the going price for a hip replacement or a piece of fine art.

Furthermore, no two pieces of real estate are precisely the same. Commercial real estate assets vary in a multitude of attributes – such as location, condition, permitted uses and existing lease obligations – that affect potential income.

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