ShortTerm Volatility, LongTerm Questions: Appraiser’s View of Today’s CRE Risks - by Willam Pastuszek, Jr.

Any reasonably perceptive observer of current events can reasonably conclude that we are in a time when the only certainty is uncertainty. Jamie Dimon’s recent observation that the economy faces “an increasingly complex set of risks” captures the current moment with great precision. As he noted, “geopolitical tensions and wars, energy price volatility, trade uncertainty, large global fiscal deficits and elevated asset prices” now coexist with positive factors, including continued consumer strength and business resilience. The combination—resilience on the surface, instability underneath, and the long term nature of holding and operating real estate—helps define the current commercial real estate environment.

ShortTerm Volatility: Energy, Tariffs, and Construction Costs. One most immediate pressure point is energy. Diesel is up 50% year over year. This cost is not simply a transportation cost issue; it is a direct input into nearly every construction activity. Petroleum-based products—from asphalt to PVC—move in tandem with fuel markets, amplifying cost swings. With crude at near $100 per barrel, contractors are repricing work, and lenders and investors scrutinizing budgets with renewed intensity. 

Electricity costs add another layer. Beyond the energy demands of existing and proposed data centers, electricity costs will feel the effects of rising costs of petroleum products. New England in particular is particularly disadvantaged by having very high electricity rates. 

While investors view this jump up in energy costs as temporary, the long view is to build in some safeguards to mitigate future shocks.

Tariffs compound the problem. In particular, metal intensive products, such as appliances, affect construction and FF&E costs. The short result is a construction environment where many projects that “penciled in” earlier, may not any longer.

What are some longerterm implications for CRE (and for those who value it)?

Feasibility Challenges. Higher, variable costs will press on creating new supply. Markets already facing structural shortages - most notably housing - are likely to see widening gaps between demand and feasible development. 

For appraisers, this means greater emphasis on reviewing construction budgets, providing real time replacementcost and more in depth reconciliations between cost, sales and income approaches. Determining feasibility indepth becomes increasingly important in a cost sensitive environment.

Operations Analysis. When Energy volatility is no longer a background condition—it become a valuation factor. Properties with energyefficient systems, onsite generation, or predictable utility loads gain in desirability. While increased operating costs may represent short term distortions that may not be reflected in historical operating statements, more efficient properties may merit, at least qualitatively, merit a risk premium. While markets may not react in the short term due to volatility, management may look for ways to absorb future shocks if indeed uncertainty and volatility are perceived as more permanent.

Interest rates and capitalization rates come under pressure as the cost of money incorporates the effect of higher prices and less certainty. Benchmarks such as 10 year Treasuries reflect marketplace perceptions; the benchmark rate then affects the perceptions of both equity and debt positions.

Conclusions. With enough of these shocks, appraisers, investors, managers and lenders will develop models that build in risk from more than one source. For appraisers, the challenge is separating shortterm volatility from structural, longerterm shifts that will shape value, feasibility, and riskadjusted returns. Only market activity will be able to give appraisers the necessary data and context. 

Shortterm volatility is real and measurable. But the deeper story is how these pressures reshape longterm expectations around cost, risk, and feasibility. Appraisers should not only be clearly and accurately documenting today’s disruptions but also seeking to understand - from available market data— how value is created under conditions of uncertainty.

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