COVID-19 Is (Probably) Pushing Down The Value Of Commercial Property

The COVID-19 pandemic, which has killed more than 40,000 people around the world, is impacting the commercial real estate market in ways both large and small. Though it is hard to get a firm picture amid the uncertainty, property valuations are likely taking a hit.

Shares of real estate investment trusts have fallen 34% between February and March 16, which implies a 24% decline in real estate asset values, a March 16 analysis by Green Street Advisors found.

The indicated drop-off ranges from a 10% decrease in the value of office towers and data centers to 50% in senior housing properties. REITs are trading at roughly a 22% discount, to Green Street's "best guess" of the underlying value of their portfolios, a bearish signal on real estate pricing, according to the company.

"Private market real estate investors, who just weeks ago were racing to deploy billions upon billions of dollars of dry powder, are tapping the brakes," the Green Street report said. "A sharp drop in transactions will limit visibility on property prices. Nobody knows where real estate values will ultimately settle."

"Our cloudy crystal ball is aided by the wildly fluctuating signals from the listed REIT and corporate bond markets, which currently suggest a nearly 20% decline in property prices," the report continues.

But "suggest" is a key word, as few deals are trading and there is little insight into the real impact on valuations.

"The economy was fundamentally sound until this contagion shut down life as we know it," Charles Hewlett, director of strategic planning and litigation support at RCLCO Real Estate Advisors in Washington, D.C., told Bisnow. "When you are in the middle of the hurricane, it's almost impossible to determine the value of a real estate asset. ... Nobody knows what the trajectory of this virus is going to look like."

Retail is one of the sectors hurt worst by the pandemic, according to CBRE.  

Department store chain Macy's announced this week that it would furlough most of its 125,000 workers through May. Like other chains shedding staff, such as Neiman Marcus, Kohl's and Gap, Macy's has been forced to shutter its brick-and-mortar locations. These chains were struggling before the pandemic.

"The economic slowdown will negatively affect most retail, especially retailers and centers already struggling to compete with e-commerce," according to a March 27 CBRE report. "There is resilience and strength in grocery-anchored and pharmacy-anchored centers. The eventual removal of social-distancing requirements might cause a surge in pent-up demand."

CBRE expects office leasing to slow in the short term and for vacancies to rise, especially in regions dependent on oil and natural gas and travel and hospitality.

The firm forecasts hotel revenue to decline by an average of 37% for 2020, with properties in high tourist and convention business areas getting clobbered.

A bright spot is the industrial market, which is benefiting from the growth in e-commerce and industrial companies, lessening their dependence on overseas suppliers.

Nearly 70% of respondents to a March 23-24 survey by the Pension Real Estate Association said they had seen deals fall through because of the current economic conditions. Another 74% had reduced or temporarily suspended their plans to deploy capital into commercial real estate, while 63% said they thought property appraisals had "material uncertainties."

Cushman & Wakefield is cautioning against drawing any conclusions about the pandemic's impact on the market.

"The commercial real estate sector is not the stock market," according to a company report. "It's slower-moving, and the leasing fundamentals don't swing wildly from day-to-day. If the virus has a sustained and material impact on the broader economy, it will have feed through impacts on property as well."

Before the world came grinding to a halt because of the COVID-19 pandemic, the sentiment among economists and others who follow the market was positive.

CBRE expected 2020 to be a "very good year" for the commercial real estate market. A survey released last year by Deloitte found that more than 70% of respondents were either somewhat or very optimistic about this year.

Many experts are now expecting the market to rebound in the second half of 2020, though with social distancing measures being extended, the future is highly unclear.