10A — September 11 - 24, 2020 — Appraisal — M id A tlantic Real Estate Journal
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A ppraisal
By Jay White, MAI, CRE, Apex Realty Advisory Commercial real estate valuation in turbulent times
T
he COVID-19 pandem- ic pushed the U.S. econ- omy into a recession
worthy essential tenants. However, a big problem now is figuring out how much a prop - erty is worth. The headline of national commercial real estate transaction activity is loud and clear: Commercial real estate transactions volume fell by 68 percent in the second quarter 2020 -- the lowest level for a second quarter since the Glob- al Financial Crisis, according to Real Capital Analytics. This headline should be taken with a grain of salt since real estate is local and property specifics are very important in real estate. Real
estate performance can differ across various locations due to divergent macroeconomic situations. For real estate to have value, four elements need to be present: demand, utility, scarcity, and transferability. Location is also very impor- tant since an asset located in a tourism-centric, leisure-ori- ented area is going to perform differently in the current pan- demic market conditions than a stabilized asset located in a diversified economic base area. Some assets will be considered riskier in the current market and therefore less in demand by many investors thus cre-
ating a spillover negatively affect impacting transaction activity and pricing. RCA reported that commer- cial property growth was posi- tive 1.5 percent year-over-year in July 2020 – meaning, price appreciation is nominally positive on a national level. Clearly, there are challenges that lie ahead related to the time for price discovery to occur between sellers and buyers, but in the short term it will put downward pressure on deal volume. It is difficult to price assets with so muchmar- ket uncertainty, let alone the unknowns related to the cre-
ation of an effective treatment for COVID-19, the restart of economic growth, the survival rates of businesses, and the durability of income streams. Many larger deals have been moved to the sidelines while others under contract are get- ting postponed with pushed out closing dates. On a positive front, lending markets have started to gain some certainty on their pric- ing and are bringing down spreads. A low interest rate environment and the potential for future inflation both bode well for the commercial real estate investment market. Ad- ditionally, it should be noted that commercial real estate is a slow moving, long-term as- set that does not reprice itself quickly. Plus, it typically lags the economy by six to nine months. In light of the current mar- ket conditions, who would sell an asset in a distressed mar- ket? On the buy-side no one wants to make a poor invest- ment decision without enough market clarity. Clearly, the concepts of confidence, stabil - ity, and liquidity are key to maintaining forward moving real estate activity. When market fundamentals become clearer and income streams more predictable, then risk can be better underwritten and pricing clarity will gradu- ally appear. Generally during periods of uncertainty, better quality stabilized properties are more attractive to inves- tors versus those with large vacancies or short-term lease rollover risk. Many inves- tors today are looking for off- market, suburban deals with defined cash flow streams, thus many are looking to buy long-term net leased assets to credit-worthy, essential tenants. The likely results of the on-going health crisis on com- mercial real estate is that deal volume will slow and the mar- ket will take a slight pause as sellers, developers, landlords, lenders, and investors all calibrate to the “new normal”. Many commercial real estate investors are itching to get deals in motion again, so it is anticipated that deal volume will return once the health crisis is behind us. However, given the current market uncertainties and the unclear timing of an effective virus treatment some investors are continued on page 11A
in Q1 2020. This in turn cascaded into the commer- cial real es- tate invest- ment market, as properties h a v e b e e n trading at a
Jay White
much slower pace. Most acqui- sitions, unsurprisingly, have focused on more pandemic- resistant asset classes like industrial, multifamily, and net leased real assets to credit
Jay L. White MAI, CRE® 101 Brandywine Boulevard Wilmington, DE 19803
P: 302-479-5300• F: 302-397-2403 www.apexrealtyadvisory.com
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