CRE Valuations Will Take Further Hits, Even If Pandemic Ends In '21

The pandemic and the economic dislocations in its wake so far have had a distinct impact in commercial real estate valuations, though it has been uneven across property types, according to a new report by Real Capital Analytics. Valuations are now at further risk going forward, depending on the course of the pandemic and federal support for the economy.

RCA's industrial price index maintained the highest annual growth rate in October, up 8.5%, while apartment prices increased 7.2% compared with a year ago. Both have been relatively stable asset classes during the current crisis, according to RCA.

By contrast, retail prices were down 5.2% in October year-over-year, continuing a trend of declines in effect since April. Prices in the office sector fell at about a 1% annual rate in October. 

Deal volume also varies dramatically by sector, RCA reports, with the gap between buyer and seller expectations narrowing in some cases. That is largely true for industrial and apartment deals, and in fact industrial property transactions are back to pre-pandemic levels.

On the other hand, the buyer-seller gap is still wide for retail properties, so not many deals have been done recently. Hotel property deals have suffered from a similar dynamic.

The future course for property valuations, especially retail and office, will largely depend on the shape of the post-pandemic economic recovery. The stronger the recovery in the economy, the stronger the boost from cyclical demand, predicts JLL Research. Since the CRE market lags the overall economy, that might be especially important later in 2021.

While the pandemic still rages, the willingness of the federal government to shore up the economy is critical, according to JLL, especially direct payments to consumers, upon whom 70% of gross domestic product depends, and who directly support retailers.

"Yet, the support that fiscal stimulus has provided consumers is fading and looks set to fall further without the passage of additional funding," the report notes.

July saw the expiration of the extra $600/month provided to the unemployed by the CARES Act, and in September, the additional $300/week under the Lost Wages Assistance program disappeared. In December, the Pandemic Unemployment Assistance program, which helps self-employed and gig workers, will also expire, as will the Pandemic Emergency Unemployment Compensation program, which provides extra unemployment benefits. 

Support for businesses will expire at the end of the year as well. Treasury Secretary Steven Mnuchin has declined to extend some emergency loan programs established jointly with the Federal Reserve, including the Fed’s corporate credit, municipal lending and Main Street Lending programs, The Wall Street Journal reports. 

“The Fed will be strongly committed to using all of our tools to support the economy for as long as it takes until the job is well and truly done,” Fed Chairman Jerome Powell said in remarks on Tuesday. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away."