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Tenants who can’t pay rent are making it harder than ever to get a proper valuation on commercial real estate assets.

“When the shutdown orders started in March, pretty much all of the prior data points became obsolete, especially for retail, hotel, senior housing and other affected real estate,” says Ross Prindle, managing director and global head of the Real Estate Advisory Group at Duff & Phelps. “So the only data point that evaluation professionals have is the public markets.”

But there are also issues with that. During the Great Financial Crisis, private real estate values held up much better than stock prices. Now, the situation is much more volatile.

“Most of the real estate investment trust stocks were affected by the broader market,” Prindle says.

Difficult questions center around how to quantify the impact of COVID-19 on private real estate and make cash projections.

“For example, all of the regional malls are closed,” Prindle says. “There are a lot of stores that are closed in shopping centers because they are not essential businesses.”

These closures are forcing significant renegotiations between landlords and tenants. “Most of the landlords are negotiating with retailers,” Prindle says.

Hospitality could be even worse, with zero to 10% occupancy in many places.

For owners required to produce financial reporting to investors, the situation can be extremely difficult. Prindle advises those clients to try to predict their next 12 months and come up with realistic cash flows.

“You need to dig in and determine which tenants are likely going to pay you, which ones aren’t and what you’re going to need to do with those tenants,” Prindle says. “That is really key.”

Prindle advises his clients to break their portfolios into different buckets. Those are the businesses that will have positive cash flow or no change in cash flow.

“Your first bucket could be real estate properties not affected by this,” Prindle says. “Their revenues are way up, or they are non-affected essential businesses.”

In the second bucket are properties that will probably recover but are going to have short-term issues due to COVID-19. These are properties that may struggle for a month or two due to COVID-19 related problems, but will eventually recover.

“Once the states open up and get to phase one or phase two [in recovery], those [retailers in the second bucket] are the ones that are going to recover,” Prindle says.

Still, Prindle says some companies in the second group will not make it. “They [landlords] need to sort of be realistic with that too,” he says.

In the third bucket are the difficult properties where many tenants may have been struggling before COVID-19. The pandemic will likely force them out of business.

“We’re talking about struggling retailers that were hanging on by a thread,” Prindle says. “Those tenants are not coming back.”