While evaluating commercial real estate in today’s coronavirus environment may seem equivalent to working with a blindfold on, appraisers say they are going into jobs with their eyes wide open.
They need to because they know what they’re up against.
In a recent survey conducted by the Pension Real Estate Association, a trade association for the institutional investment industry, members said they believe most appraised values during the pandemic will have material uncertainties. Less than 1% said appraisals conducted now would be as accurate as under normal circumstances.
The sentiment is not lost on the industry. While experts acknowledge that valuation is more of an art not a science, it is an art driven by data. Even in the throes of massive economic disruption, appraisers are still relying on reams of ever-changing information that cross their desks daily.
They are keeping close track of timely employment numbers, tenant retention strategies, rent relief options, risk abatement measures and market liquidity.
Grant Griffin, senior managing director in the Atlanta office of BBG, a valuation advisory firm, told CoStar News that his firm is using industry consensus opinions and outlooks as well as daily reports from news outlets, brokerages and clients to fill in for actual results.
For example, if there are reports that tenants are asking for three months of rent forbearance, BBG will factor in what percentage of tenants in an industry are asking for delayed payments and calculate that percentage reduction in income for similar properties.
Ron DeVries, senior managing director of Integra Realty Resources in Chicago, said his firm relies on what its 500 employees in 50 offices are hearing and entering into databases to keep current.
Both Griffin and DeVries participated in an Appraisal Institute member video late last week on the valuation impacts of the pandemic and shared their insights with CoStar News.
Griffin focused on retail properties, one of the hardest-hit sectors due to state-mandated closures of nonessential businesses. Retail sales were down in March, and April is expected to be much worse.
The data Griffin tracks includes:
- The percentage of retail tenants paying rent and the percentage of those paying full rent or partial rent.
- Months of lost income forecast by retail property owners.
- How long before the leasing market returns and what rates will be when it does.
- Renewal probabilities for tenants.
- Which tenants will be able to reopen first when states start relaxing their stay-home rules.
- What percentage of tenants will not reopen.
For all these categories, there is data available from conversations BBG is having with clients and other third-party sources. Moreover, the numbers are different from market to market and property to property. All that information makes its way into cash flow projections for property and portfolio valuations.
Integra’s DeVries focused on multifamily valuations. Along with tracking similar data as Griffin, he said he looked particularly at apartment classes and the employment levels and projections for the markets in which properties are located.
“On the multifamily side, there is a clear difference between luxury and everything else,” DeVries told CoStar. “Luxury is tracking pretty closely to their historical collection rates. Not so for other multifamily categories.”
The driver for recovery in any sector of multifamily is heavily tied to employment. For example, DeVries noted that Seattle, being the first market to report coronavirus cases, would likely be among the first to recover. As a high-tech market, jobs there should bounce back quickly.
On the other hand, a market such as Orlando, Florida, where employment relies heavily on tourism, could be slower in its recovery.
The timing of the valuation is also critical, according to Griffin and DeVries.
Any owners needing to sell right now could likely be facing a much lower valuation. They would have to be motivated to sell into this market, and they’re going to get a much lower value because of that, the experts said.
Financing conditions are also being factored in, both appraisers told CoStar. The pandemic has made the cost of capital more expensive.
While interest rates may have come down, other costs to borrowers have increased.
Banks are demanding more equity up front, thus driving down the loan-to-value ratio. The extra cost to the borrower is lowering the potential yield on the property.
Lenders are also moving away from interest-only loan repayment plans. Thus, borrowers are having to repay both interest and principal on new loans, which also is cutting into yields and reducing property net incomes.
With so many elements changing so rapidly, Griffin concluded, “While it is not the answer you’re looking for, how properties are valued really comes down to a market-by-market, case-by-case basis.”
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