UCLA Economist: REIT Pricing Suggests CRE Values Have Repriced Lower

Many investors are hitting the pause button, at least for the short-term, as the pandemic plays out. Market volatility and a general uncertainty are surely contributing factors to the decision, but in addition, it has become challenging to price deals in the current market and face-to-face interaction has come to a halt.

“No one knows what pricing is right now. How do value a home right now? How do you value a regional mall right now? There is a lot of skepticism in the market, and no one knows how to value anything,” David Shulman, senior economist at UCLA Anderson, tells GlobeSt.com. Shulman adds that deal making has also stopped as a result of social distancing practices. “You are limiting face-to-face communications, and there is only so much that you can do on Zoom and on Skype. That market is frozen right now,” he says.

If you look at REIT pricing, commercial real estate values could be in for a steep pricing decrease, according to Shulman. “REITs have fallen more than the overall market. If the REIT market is correct, you are going to have to mark down commercial real estate 10% to 20% compared to what people thought it was a month ago,” he says. “That is if the REITS are correct. The REIT pricing has suggested that commercial real estate has been radically re-priced lower.”

In addition, tenants will likely face challenges paying rent as a result of the mandated closures. While there has been some discussion of mortgage forbearance, Shulman doesn’t see how that would be possible. “If it was an individual bank lending to an individual borrower, it would be easier,” he says. “In a securitized world, it becomes very hard to do forbearance. Freddie and Fannie said they would do forbearance, but I don’t know how the investors expecting interest payments get paid on the other end. That is what happened in 2008 and 2009, so we are dealing with the same issues.”

In addition to pricing and potential cash flow issues, this event could put pressure on mounting trends that will ultimately diminish demand for certain asset classes, particularly retail and office. “This may accelerate some trends that are already in place, like online shopping.,” says Shulman. “It will accelerate that way more quickly. This has highlighted daily needs, but people aren’t going to shop at other stores. They will do that online. As for co-working, the model is also going to be impacted. It is very dense, and people might not want to be so close together anymore. In addition, people are really learning how to work from home right now, and that will adjust the need for office space.”