Recently we have sold several multifamily assets where the appraisal came back a good bit less than the sale price.
In both cases, there was 7+ offers presented for the asset, with some offers exceeding the asking price. Yet for all the demand, the appraiser’s opinion was that it was not worth even our asking price.
This makes us wonder- how can you have so much demand and not have the value? Appraisers are using lagging data, which in an appreciating market can cause a shortfall like these examples here.
However, a ‘Time Adjustment’ is the mechanism for compensating for using historical data, which like appraisals, is part art and part science.
These adjustments become essential in a rising or falling market, as a means to provide an accurate understanding of fair market value.
- In stable or slow-moving markets, time adjustments may be minor.
- But in rapidly appreciating or declining markets, failure to properly account for market changes can lead to inaccurate valuations that affect investors, lenders, buyers, and sellers alike.
What Is a Time Adjustment in a CRE Appraisal?
In a commercial & Multifamily appraisals, the sales comparison approach evaluates the subject property’s value by analyzing the sale prices of recently sold, similar properties (known as “comps”).
If a comparable sold, say, 12 months ago, and the market has changed significantly since then, the appraiser must adjust the sale price forward or backward in time to reflect current market conditions.
This process is called a time adjustment, and it’s based on the principle that property values fluctuate over time due to inflation, interest rates, investor demand, construction costs, supply constraints, and broader economic shifts.
A similar process is followed with an income approach to value, which is also part of a commercial real estate appraisal. Even in vacant commercial properties, an appraisal will use the income approach with assumed inputs, in order to arrive at a secondary guiding point to value. Because CAP rates also rise and fall with market conditions, the income approach also is subject to timing adjustments.
Example of a Time Adjustment
Suppose you’re appraising a 24-unit apartment complex. A similar property sold 10 months ago for $130,000 per unit. Data shows that market values for similar assets have increased by 0.8% per month over that period. The appraiser would apply an approximate +8% time adjustment, bringing the adjusted comp to $140,400 per unit before making other adjustments.
The formula typically looks like this:
Adjusted Price = Sale Price × (1 + Monthly Market Change Rate)^Number of Months
This adjustment normalizes the comparable to reflect what it would sell for today, which is the effective date of the appraisal.
How Appraisers Determine the Rate of Market Change
Appraisers don’t guess at the rate of change—they rely on a combination of:
- Local market studies and trend reports (e.g., CoStar, RealPage, Yardi, etc)
- Repeat-sale data, when available
- Paired sales analysis, where two similar properties sold at different times are compared
- Broker opinions and investor interviews, especially when hard data is limited
- Market-specific appreciation or depreciation curves, often supported by appraisal guidelines or historical transaction data
The appraiser is required to justify and document the basis of any time adjustment. In volatile markets, this analysis becomes a larger and more sensitive part of the appraisal process.
Why Time Adjustments Matter in a Changing Market
1. Prevents Overpaying or Undervaluing
In a rising market, using unadjusted sales from six to twelve months ago can undervalue a property, leading to lower-than-expected loan amounts or mispriced sales. In a declining market, failure to apply downward adjustments could result in overpaying, inflating risk for both investors and lenders.
- Understanding the market dynamics was the key here for these recent investors to feel confident they are not overpaying for the asset. Even though the appraisers did not see the appreciation, the buyers did.
2. Affects Lending Decisions
Lenders rely heavily on appraised values to underwrite risk. An accurate time adjustment can make the difference between a deal that pencils and one that doesn’t. In times of contraction or expansion, small errors in adjustment can translate to millions of dollars in loan proceeds or risk exposure.
- In our recent experiences, the lender cut the loan proceeds because of the appraisal reduction. However, the buyers had sufficient cash that the appraisal reduction did not rerail the deal.
3. Impacts Investment Strategy
Investors looking to acquire or sell in a shifting market must understand how quickly values are moving. If cap rates are expanding and values are falling, for example, a delayed time adjustment could overstate an asset’s value and distort your pro forma. Conversely, aggressive upward adjustments can make a value look stronger than market fundamentals justify.
- Knowing the direction of the rent growth for income property is the key piece for the investor. If you expect rents to grow- naturally the value of the property will be growing as well.
Common Pitfalls and Tips
- Don’t assume older comps are useless. In markets with few recent sales, older comps can still be useful if adjusted properly. Do not overlook active listings and pending sales as supporting evidence.
- Time adjustments are not automatic. Just because time has passed doesn’t mean values have changed. Appraisers must demonstrate a measurable shift in market conditions.
- Avoid assuming that time always increases value; markets can decline.
- Watch for lagging data. Published reports may be 60–90 days behind market reality. Appraisers should supplement reports with active listings, investor interviews, and pending deals.
Final Thoughts
Time adjustments in commercial real estate appraisals are essential to make sure that the process of valuation is an accurate reflection of the market. The appraisers using these adjustments are using their art to balance supply and demand dynamics with black and white paper valuations.
Investors watching these adjustments and understanding their market can buy with confidence no matter the direction of the market, when they understand the underlying fundamentals.
Many investors we work with appreciate the in depth knowledge that they benefit from when working with our company, so that they can make sure they are obtaining fair and accurate prices. If you are considering selling an asset in the next year, contact us for a Broker’s Opinion of Value.
