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‘Investors Are Finished With Covid’: CRE Valuations Weather The Pandemic

Commercial property values are more resilient nationwide than headlines about the coronavirus and the unsettled state of the world might otherwise indicate, valuation experts say.

The darling property types of the pandemic — mostly industrial and multifamily — have almost universally seen cap rate compression in the past 18 months as investors loaded with capital snap up those assets. More surprisingly, office and even retail and hospitality valuations haven't been pummeled that badly since early 2020, a testament to the belief among commercial real estate investors that the course of the pandemic, even the delta variant surge, won't impact values in the longer run, perhaps even after this year.


"The delta surge may be causing some investors to reconsider how aggressive they want to be, but other than that, it’s not affecting pricing," Green Street Advisors co-Head of Strategic Research Peter Rothemund told Bisnow in an email, referring to lodging, one of the hardest-hit sectors amid the pandemic.

Investor interest in commercial properties proved to be robust in the first half of 2021, and the steamroller continues despite worries about the ongoing pandemic. Sales of U.S. commercial properties $25M and above jumped to a near-record high in the first half of 2021, with $138B of trades across property sectors, Green Street reported in its midyear broker rankings. That makes the first half of this year the busiest January-to-June period since 2007.

Investment volume was up 62% during the first half of 2021 from the same period in 2020 and even topped the $135B of deals seen during the first half of 2019. Brokers anticipate seeing another record topple in year-end tallies, Green Street said.

"Nimble and opportunistic private investors are aggressively working to place capital and take advantage of low financing rates and a recovering economy," the company reports. "More than 2,700 smaller sub-$25M properties totaling $28B [also] sold in the first half of this year, up 60% year over year."

For most property types, cap rates have either stayed stable or declined since before the pandemic, pointing to higher values as investors returned to the game (or kept in the game) in 2021, CBRE reports.

"While uncertainty remains, cap rates are expected to increase in very few U.S. markets through year-end," CBRE Global Chief Economist Richard Barkham tweeted in early September. "This is consistent with CBRE’s view that a strong economic recovery will benefit property values."

Investor interest hasn't driven valuation recovery in all places, however. In the hospitality sector, CBRE reports that cap rates in the first half of 2021 were mixed.

Some markets, such as New York City, saw increases. Full-service hotel cap rates rose from 6.5% to 7.5% in the second half of 2019 to 6% to 8% in the first half of 2021. Other major business travel markets such as Washington, D.C., Chicago and Houston likewise experienced rising cap rates over the same period. On the other hand, more leisure-oriented markets such as Las Vegas and parts of South Florida enjoyed cap rate compression over that period.

Extended-stay hotels are a subsector of hospitality that is doing well, attracting investor interest that is pushing up prices for those properties that actually come on the market, according to Reveille Hospitality CEO Marco Roca Sr.

"We're going to see a trend of cap rate compression over the next 24 to 48 months in this segment," Roca said. "The properties used to have cap rates that were higher than full-service hotels, but extended-stay properties have actually done well during the pandemic, catering to business travelers who can't do their jobs on Zoom — construction workers or nurses or business people setting up a new office, for example." 


Retail, the other sector slammed the most by the pandemic, managed to avoid higher cap rates during the first half of 2021, CBRE reports, with some exceptions in some places. Neighborhood and community retail center valuations — the sort of places typically anchored by grocery stores — did best, especially in growing metros.

“Orlando continues to be one of the fastest-growing metro areas in the U.S., and there was no slowing down with Covid,” said JLL Senior Director Whitaker Leonhardt, who was one of the brokers on the early September $30.5M sale of Plaza Ecco, a neighborhood center in Orlando anchored by the grocery store Publix.

“2020 was the second-best year for in-migration over the past decade for the city," Leonhardt said. "The long-term success of its economy has kept Orlando at the top of the list for many national retail investors.”

Indeed, retail cap rates were down in Orlando from 5.5% to 6.5% in the second half of 2019 to 5% to 5.75%, according to CBRE. Other markets with neighborhood center cap rate compression over that period include Denver, Tampa and Sacramento. 

Office valuation was also a mixed bag. Despite the persistent uncertainty about who will return to office and when, office cap rates remained stable or compressed in most but not all central business districts. San Francisco, Philadelphia and Nashville all saw valuations fall as cap rates rose.

Investors haven't given up on CBD office, at least not in markets still considered strong, such as Downtown Denver, where cap rates have been stable since the pandemic.

CP Group Senior Vice President Brett Reese said his company was glad to enter the Denver CBD recently with its acquisition of the 600K SF Granite Tower.

"Granite fits directly in our strategy, which is to acquire institutional-quality, value-add opportunities in growth markets across the country," Reese said.

Most suburban office markets also remained stable or saw a bit of cap rate compression, CBRE noted. Suburban Houston, Denver, Philadelphia and other markets experienced rises, however.

The darling property types of the pandemic, industrial and multifamily, saw considerably more cap rate compression during the first half of 2021 compared to the second half of 2019. As the appetite for industrial space continued unabated, valuations rose consistently. Every industrial market reported lower cap rates compared with before the pandemic, CBRE reported. 

Some industrial market cap rates are exceedingly low. All of California's markets are experiencing cap rates ranging from 2.8% to 3.5%, down from 3.75% to 4.25% before the pandemic. North New Jersey ranges from 2.9% to 3.25%, down from 3.75% to 4%.

In the apartment sector, only three multifamily infill markets experienced cap rate rises during that period: Philadelphia, Oklahoma City and Portland, Oregon, CBRE reports. Every other market saw cap rates stable or falling. Moreover, no suburban multifamily market saw an increase in cap rates during the pandemic. Now the focus shifts to the future.

"For the most part, investors are finished with Covid," Rothemund said. "They are looking to next year and beyond."