Even as the pandemic stretches into its tenth month, there is still a significant spread in price expectations between buyer and seller—a spread fueled by differences of opinion about future rents, occupancies, business prospects and ultimately, expectations of net cash flow going forward, according to a report by Moody's Analytics and CWCapital. Right now, owners are valuing properties on pre-COVID performance, while opportunistic buyers are looking at the new reality.
Others agree. "The sentiment is that sellers are still looking at values in a rearview mirror, and buyers are looking at values on a going-forward basis," Pat Jackson, CEO and founder of Sabal Capital Partners, told GlobeSt.com in an earlier interview. "Until you get that kind of acceptance that sellers need to get rid of assets and it is what it is, trades won't start happening.
Eventually, poor performance will cause increases in cap rates. Moody's Analytics REIS predicts that a rise in cap rates will prompt a decline in value ranging anywhere from 7% to 9% in multifamily and industrial to 20% or more for office, retail and hotel.
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The Moody's Analytics (CPPI) Commercial Property Price Index projects similar declines. From peak to trough, values are expected to fall 10.6% from multifamily, 23.2% for office, 31.6% for retail and 9.7% for industrial.
Others don't think values will fall this far. The Pension Real Estate Association suggests that owners and managers of institutional-grade commercial properties expect values to fall only 4.9% in 2020 and zero in 2021 after adjustments are made for capital expenditures. That figure is much lower than the approximately 30% discount opportunistic buyers are expecting.
By comparing appraisals completed after April 1, 2020, for newly specially serviced assets to the values reported at underwriting, Moody's Analytics and CWCapital was able to calculate price declines. Hotels saw a median value decline of 30%, with the largest individual declines in full and limited service. Retail experienced a median decrease of 25%, with the most significant drop in malls. Mixed-use centers experienced 35% declines, with urban centers getting hit the hardest.
Moody's Analytics and CWCapital expect transaction volume to remain muted through early 2021, depending on how the economic data, CRE fundamentals and the global economic recovery plays out.
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Leslie Shaver
Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.
