Deal Volume Is Up, But Market 'Nowhere Near Normal'

CRE transaction volume has picked up notably over the past few months, but the market is still nowhere near normal, according to a panel of experts Trepp recently convened to talk about valuation trends.

A looming question, according to panelists, is whether federal stimulus aid has avoided or merely postponed prolonged distress.  Jeremy Walling, Executive Vice President, Valuation & Advisory Services at Colliers International, noted that while government aid definitely avoided some distress early on in the pandemic, aid of that scale always come with unintended consequences, so investors should “maintain a watchful eye” on all markets – including those that have seen minimal impact thus far. 

Trepp’s Head of Advisory Services Lonnie Hendry noted that in January 2020, about 11% of loans in Trepp’s database were on lender watchlist.  By December, that number had doubled to almost 22%, with “market uncertainty showing definite distress.” As of June 2021, the watchlist number remained around 27%, a figure “which shows the continuing uncertainty and the tenterhooks that the market hangs on when looking at the future performance of CRE properties,” Trepp analysts noted in a recent summary of the panel discussion. Delinquency and special servicing rates also skyrocketed during the pandemic, with hotel rates at 20% in December and 14.27% in June. Retail hit a high of 13% in December and clocked in at 10.71% last month.

“Those areas of the market that have seen the most distress have also faced the most dramatic change in property valuations,” Trepp’s Hayley Collier writes. “While distress has been seen primarily in the hospitality industries, there is also a lack of clarity among borrowers which makes the current situation even more complicated.”

In the hospitality sector, “valuations must be painted with less of a broad stroke, to truly understand the demand for an asset and what the demand will be going forward,” Collier writes. 

“Investors want a return on and return from their money so they can accurately price the risk so they can get the yield they desire,” she says. “But, when you do not know, which we don’t right now, the long-term effect of Covid on Cap rates, how ESG, eviction moratoriums, and other government regulations are going to have an impact in the future, how do you price for these considerations?”

The experts agreed that deal activity will likely pick up in the second half of the year, considering the record amount of dry powder sitting on the sidelines waiting to be deployed. And with that increase, more clarity will likely result from a sales transaction perspective.