Change, volatility, and uncertainty - by William Pastuszek Jr.

Investors, analysts, and appraisers are constantly dealing with uncertainty and volatility. Appraisers learn in Appraisal 101 about the principle of change: markets are dynamic, behaviors change in light of recent events. (The concept is not unique to appraising to be sure.)

Markets react to short-term volatility: appraisers take the longer view of typical investors in forming value opinions. With all the residential and commercial data available, getting the right comps should be a given, but markets are far from being transparent. Missing a few key comparables may affect the credibility of results. On the other hand, a professor in class made the point that “one data point does not a market make.”

The art and science of appraising comes from systematically and logically arriving at correct interpretations of market activity. Let’s examine some important concepts.

Distinguishing between change, volatility, and uncertainty is fundamental to achieving and performing credible valuations. These terms overlap in some ways but they represent distinct dimensions of market behavior that impact risk assessment and reliability of value opinions.

In appraisal, change in a larger sense represents evolution. Change can be short-term but is typically driven by fundamental economic shifts.

Volatility represents short-term change, and the speed and magnitude of market fluctuations. It is the “noise” in the market, often stemming from reactions to external shocks. If we want to be technical, volatility is a measure of variance, whereas change reflects a broader view.

Uncertainty arises when markets lack direction or data points. The great challenge is appraising under low volume/no volume market conditions when there are sudden shifts in behaviors. A prime example is the first few months of the pandemic shut down. Uncertainty in market direction may require higher risk premiums and the exercise of critical thinking.

These concepts raise questions. How do appraisers sort through all the “market noise,” the daily, weekly drumbeat from blogs, newsletters, social media, news articles, etc.? Reading some of the media pieces out there suggests that real estate somehow functions in the same short-term box as the stock market.

The truth is more complicated. Successful real estate investors take the long view: they are dealing with a relatively illiquid investment. Day to day, or week to week fluctuations matter less for properties that are tied up with long-term leases. And there are exceptions of a sort. Some classes like lodging and self-storage vary constantly; proactive management is needed: the longer investment horizon goal builds in these various situations.

Many successful stock investors are relatively indifferent to short-term swings in equity prices. A basic appraisal procedure: appraisers interpret essentially retrospective data and balance the findings against more current “real time” data that may exhibit volatility (i.e., short-term shifts). The process leads to conclusions about how the price paid for a property incorporates expectations about the future. Take cap rates for example. Just collecting data and averaging it isn’t enough: judgment and the ability to analyze and convey the results cogently is key to successfully navigating complex market conditions.

In the longer view, how do appraisers successfully and logically take transactional data and interpret it from the viewpoint of buyers? The principle of anticipation is at work here. Real estate buyers and based their behavior on where they think their investment is going to go in the future. For income property, the key variables are anticipated future income and capitalization rates that reflect risk and uncertainty. (One way to define real estate investment risk is the uncertainty of quantifying expectations of achieving expected returns. Risk concepts will be the subject of another article!)

Conclusion. The theme for 2026 is looking for real recovery in some commercial market sectors, understanding “price discovery” by investors, comprehending the nuances of local markets and dealing with volatility, risk, uncertainty. Appraisers have always had to deal with change as first principle; it’s the ongoing uncertainty and volatility that makes valuation that much more challenging. Big data and AI may help but they are only tools. Don’t get too locked in either with retrospective data or current short-term data and viewpoints. Be careful out there.

William Pastuszek Jr., MAI, ASA, MRA heads up Shepherd Associates LLC, Needham, Mass.