Valuations Forecasted to Decline in COVID-19’s Wake

Taking a pulse on the impact of the pandemic on all sectors of global commercial real estate, valuation firm Duff & Phelps, in conjunction with the GRI club, surveyed over 300 directors on the state of affairs. 

A vast majority of US-based responders, 83% anticipate a U-shaped recovery, and just under half of those surveyed, 49%, said little damage has been done to GDP.

However, many respondents said they expect valuations to take a big hit. Nearly four out of 10 respondents, or 39%, expect valuations to fall by 5% to 10%, and another 31% feared a heavier impact. Also telling, 90% of those surveyed are hoping that “valuations may start to creep back to their pre-pandemic levels” in 2021.

On a positive note, when asked by Duff & Phelps if they could take advantage of valuation opportunities as they arise, 70% of the executives said they could deploy capital when needed. However, private property companies did indicate that they would lag in their response to receive approval and 41% of respondents admitted they don’t have the capital ready so they’re freezing their commitments for a few months. Meanwhile, 15% of respondents are set to increase their capital requirements.

In a separate measure, pricing has shown significant variation by property type, according to Green Street’s all-property index, which  is 10% below pre-pandemic levels. 

“Pricing of properties with little downside to rents—and those with a high-credit tenant and significant lease term—has held up; in some instances, values are higher than they were prior to the pandemic,” said Peter Rothemund, managing director, Green Street. “Prices of most other properties are lower by 5-15%.”

Evaluating CRE by industry, retail, hotels and restaurants and bars were expected to bear the worst long-term impact of the shut-downs, with 37%, 36% and 16% of respondents to the Duff & Phelps survey, respectively, tagging those sectors. “As a result, the report said, commercial real estate investors will naturally be looking elsewhere for assets that have proven to be more pandemic resistant.”

Office also didn’t fare well in the survey either, with just 2% of survey responders anticipating growth in the segment.

On the flip side, more than a third of respondents, 36%, predicted that the industrial and logistics sector will emerge the strongest from the pandemic. Given the surge in online shopping brought about by the crisis, last mile facilities will become increasingly important, the report stated.

Residential real estate also ranked high, with 26% of respondents forecasting growth on that front.

Commented Ross Prindle, managing director and global head, real estate advisory group, Duff & Phelps, “COVID-19 has affected the real estate industry profoundly as transaction activity is down and many industries are in outright stress. Retail properties that have reopened have seen mixed results, with some in premium locales faring well and others in secondary locations doing poorly due to ongoing restrictions on capacity and lack of foot traffic.”

But he continued, “The bright spots have been logistics properties and, unsurprisingly, properties occupied by businesses deemed as essential. As we work to make it out on the other side of this pandemic, logistics warehouses will become an increasingly desired investment opportunity as the preferred retail shopping method accelerates from brick-and-mortar stores to e-commerce.”