Recently we’ve sold several multifamily assets where the appraisal came back a good bit less than the sale price.
In both cases, there were 7+ offers presented for the asset, with some exceeding the asking price. Yet for all that demand, the appraiser’s opinion was that it wasn’t worth even our asking price.
That makes you 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.
A ‘time adjustment’ is the mechanism for compensating for the use of historical data, which, like appraisals themselves, is part art and part science.
These adjustments become essential in a rising or falling market, as a means of providing 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 and multifamily appraisal, 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 the income approach to value, also part of a commercial real estate appraisal. Even in vacant commercial properties, an appraisal will use the income approach with assumed inputs to arrive at a secondary guiding point to value. Because cap rates also rise and fall with market conditions, the income approach is subject to timing adjustments too.
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 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, 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 (CoStar, RealPage, Yardi, and similar sources)
- 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, failing to apply downward adjustments could result in overpaying, inflating risk for both investors and lenders. Understanding the market dynamics was key for our recent buyers to feel confident they weren’t overpaying — even though the appraisers didn’t 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 periods of contraction or expansion, small errors in adjustment can translate to millions of dollars in loan proceeds or risk exposure. In our recent experience, the lender cut loan proceeds because of the appraisal reduction — but the buyers had sufficient cash that the reduction didn’t derail 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, 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 rent growth for an income property is key for the investor — if you expect rents to grow, the value of the property will naturally grow 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. Don’t overlook active listings and pending sales as supporting evidence.
- Time adjustments aren’t 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 the valuation process accurately reflects the market. Appraisers using these adjustments are balancing the art of supply-and-demand dynamics with the science of black-and-white paper valuations.
Investors who watch these adjustments and understand their market can buy with confidence no matter the direction of the market, as long as they understand the underlying fundamentals.
Many investors we work with appreciate the in-depth knowledge they gain working with our company, so they can be sure they’re getting fair and accurate prices. If you’re considering selling an asset in the next year, contact us for a Broker’s Opinion of Value.
