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Investors Are Starting To See Hefty CRE Discounts In Gateway Markets

The anticipated drop in real estate values is starting to appear in major commercial real estate markets.

The Transamerica Pyramid In San Francisco

Some commercial properties have recently sold at discounts between 10% and 30% amid the pandemic, major commercial real estate investors said on a Bisnow webinar about deploying capital Tuesday.

Artemis Real Estate Partners is close to closing a transaction for an office building in a gateway market at a 30% discount to its pre-coronavirus rate, Managing Director Anar Chudgar said

“We're seeing the discounts,” she said. “Until we find a vaccine, there will be downward pressure on the New York City and major gateway cities' office sector.”

Chudgar was joined by Metropolitan Realty Associates CEO Joe Farkas and Dream Equity Partners President Rahul Idnani. Dream recently closed on a deal with a low-single-digit discount, Idnani said. In San Francisco, Michael Shvo closed on the Transamerica Building at a 10% coronavirus discount this week, and a Midtown Manhattan property is reportedly being sold at a 30% market discount. 

Starwood CEO Barry Sternlicht recently said he anticipates New York City office buildings' values could plummet up to 40%. 

While office is in the middle ground between the extreme distress of hotel and retail properties, industrial space has remained strong and even sold at higher than their pre-coronavirus rates, the panelists said.

“It’s a tale of two cities,” Chudgar said. 

With everyone remaining in their homes, the multifamily market has remained strong as well, Idnani said.

Retail, an asset class that was already struggling before the pandemic, is struggling all the more. Farkas said Metropolitan Realty Associates is planning to buy up distressed retail assets and convert them into industrial assets. In order to do this, Farkas said that knowledge of local zoning and construction is key. 

“The heavier lift is having the construction and development expertise on how to look at a box, whether it be a single-story or a two-story box,” he said. “You really have to understand architecture and structural engineering.” 

Clockwise From Top Left: Metropolitan Realty Associates founder and CEO Joe Farkas, Artemis Real Estate Partners Managing Director Anar Chudgar, Dream Equity Partners at Dream Unlimited President Rahul Idnani and Bisnow Deputy Managing Editor Ethan Rothstein.

The jury is still out on office, even among the panelists. While Farkas predicted that offices will continue to hold steady, Chudgar disagreed, saying that in the short term, she expects leasing velocity to slow and a lot of vacant space to materialize, especially in the coworking sector. 

Overall in the market, buying distressed properties has been complicated: Buyers think they should get a “COVID discount,” while sellers are sticking with higher prices, Farkas said. There is also a lot of dry powder on the sidelines. 

“It’s almost like you try and buy a car at a car dealer and you think you’re going to get some tremendous deal and they’re like, 'No, I am not selling it to you for that,'” Farkas said. “It doesn’t matter how much money you have on it, there’s a mismatch between buyers and sellers. ... The amount of dry powder is holding the market firm, particularly in strong gateway markets.” 

Transaction activity on all properties has been more difficult, Idnani said. With travel restrictions, potential buyers are relying on local, on-the-ground representatives to assess the value. Or, in the case of Farkas' company, which only operates in its home market, it could be an advantage.

“Joe can take an Uber or drive his car and go look at an asset pretty quickly. If you have a national model, how do we cover that?” Idnani said. “We look at our boots on the ground to tell us.”

Idnani said that for big deals, someone has to walk the property, and this may affect deal flow. He got on a plane and flew to Dallas to do a final walk-through on a $180M portfolio deal before closing this week. Farkas called him "brave" for flying commercial.

“I don’t see how people can buy real estate by doing a virtual tour,” Idnani said.

CORRECTION, JULY 9, 1:15 P.M. ET: Farkas said buyers think they should get a “COVID discount” while sellers are sticking with higher prices. A previous version of this article inaccurately stated that Farkas said sellers were looking for discounts and buyers were sticking with higher prices. This story has been updated.