Using the Past to Predict CRE Pricing

While most investors have the phrase ‘past performance is not indicative of future results,’ memorized, the truth is it can still help to look at the past to understand future performance, according to Omar Eltorai, market analyst at Reonomy.

“While the last recession is not the same as the current, it is still helpful to acknowledge the historical experience—even if only to bookend our expectations,” Eltorai says. “This recession has different drivers which include a health crisis, business crisis, liquidity and solvency issues, shift in consumer behaviors and political disruption in both the foreign and domestic spheres.”

Eltorai cites the cause of the crisis, consumer and business financial health preceding the crisis and the speed and scale of government intervention as the main differences between 2008 and today. “All of these differences mean that pricing will likely not move the same as the last recession,” he says. “On one hand, the macroeconomic picture is much more dire than that of the last recession, which would suggest deeper and longer pricing declines.”

Before the last recession, apartment pricing was inflated because of converters buying condos. This time the situation is different. “In terms of condos, while the decreased inventory of residential units due to condo conversions does support higher pricing, this impact is greatly mitigated by the fact that this crisis has decreased the overall demand for close proximity to the cities where these conversions were taking place,” Eltorai says.

On the other hand, however, there is a strong investor appetite for commercial real estate and multifamily today.

“The lenders are in much better health, and there is a lot of private capital waiting and ready to jump in,” Eltorai says.

“Bringing all of these factors together and looking at multifamily across the nation, I believe that the next 18 to 24 months will show many properties selling at discounts to last years’ highs. Though there will be greater pricing support than the last recession from the large amount of appetite and dry powder ready to be deployed.”

To gather information, Eltorai studied the REITs. “REITs tend to have a quality bias baked in, as they are professionally managed and managed to maximize shareholder value,” he says. “However, the REITs are a good proxy because they collectively own a significant portion of the market and have regular and public reporting.”

Apartment REITs reported negative year-to-date returns of (24.3%) at the end of March, slightly below the (21.7%) for all equity REITs. Still, they performed much better than lodging (51.0%) and retail (47.2%), according to Nareit.

“Looking at the REIT performance, we can see that the residential REITs have recovered significantly since their recent lows and are performing better than hospitality and retail,” Eltorai says.

Within the residential sector, Eltorai says single-family home and manufactured housing REITs are performing better than apartments.

“The difference between apartments and single-family housing REIT performance is illustrative of the dispersal of employees as remote work is proven to be effective for many companies,” Eltorai says.