CRE’s Pricing Disconnect

Since COVID hit, there has been a disconnect in the market

While listed real estate markets have been volatile and private markets have enjoyed relatively steady valuations, according to MSCI’s head of Real Estate Solutions Research, Will Robson.

Some small disconnect isn’t anything new. “There has always been a disconnect between the markets and the private markets, probably because there is leverage within those [public] companies, and it is pricing the company, rather than just the underlying assets,” Robson says.

However, when COVID hit, Robson says there was significant repricing on public assets. But valuations on the private side didn’t move as much, especially in the first quarter of 2020. “We saw a bit of movement in the second quarter, but it was in the low single digits when you look at US real estate as a whole,” he says.

Robson says this adjustment occurred to account for the short-term COVID income disruptions.

“When you see three months or six months’ loss of income and when you price that in, you’re generally looking at low single digits in terms of valuations,” Robson says.

In the second half of the year, Robson says there was a correction in the listed markets. Things like positive vaccine news increased valuations by the end of 2020. Now, there aren’t massive gaps between the private market and the public market. 

Looking across all sectors, Robson sees a divergence in pricing. In retail, he says there is a direct link between the revenue a tenant makes in a store and the rent it pays in that store. But that isn’t the same in other sectors. “In offices, the link between the revenue of the company and the worth to the tenant is less direct. So most of the tenants are going to pay rent through COVID, even though they’re not using that space.”

But that could soon change, which could hit office valuations. “As tenants come through to the lease expiration or the rent review date, they’re thinking through their longer-term plans about how they’re going to use office space going forward,” Robson says.

Robson sees many of the same sector wide trends that others do. “Industrial has continued to be very strong and even accelerated in some markets,” Robson says. Office has been in the middle because it didn’t have the same hit on the tenant’s business models and their ability to pay rent.”

Even inside some sectors, pricing varies dramatically.

“Obviously, retail has been hit the hardest,” Robson says. “There was already a negative story around a lot of retail sectors before COVID hit. And COVID just accelerated that and entrenched that narrative.”

Pricing has been hit hard in those sectors. On the other hand, supermarkets and other essential retail have held up much better.

“Essential retail is obviously on the other end of the spectrum,” Robson says.