There May Be CRE Opportunity Post-Coronavirus, If We Can Find Out What Anything Is Worth

The commercial real estate market is in limbo, with developers waiting to see if opportunities for low-interest rate refinancing and acquisitions bubble to the surface.

But, the timeline for finding these opportunities in the post-COVID-19 landscape remains murky at best, especially as valuations are difficult to pin down.

It's likely to stay this way until the timeline for curtailing the impact of the coronavirus becomes more apparent, giving appraisers the data needed to make true property valuations, National Valuation Consultants Senior Managing Director Chuck Dannis and Dreien Opportunity Partners CEO Sam Ware said during Bisnow's "Weathering A Downturn" webinar Tuesday.

“Appraisers are just going to have to wait,” Dannis said.

“They are going to have to look for other things than just sales [as part of their valuations], which appraisers normally do. I think it’s pretty naive to think that values are not changing as we speak.”

A guidepost for what the COVID-19 downturn might look like is the 2008-2009 recession. But, there is one major difference between that economic meltdown and the COVID-19 crisis, Dannis said.

While the '08-'09 recession was caused by investors marking down assets and pushing up cap rates to deal with increased market risk, the coronavirus downturn is the result of market uncertainty over a disease that will end at some point. 

“What I think we are going to see this time is just a sudden and precipitous, unprecedented drop in net income in a lot of the property types — hospitality, student housing, senior housing and the restaurant business,” Dannis said. “This time I think we are going to have income shock … and so if, we don’t even change the rates, property values are going to come down.”

Ware agreed that while on the surface cash flow and income disruptions devalue properties, the temporal nature of the COVID-19 crisis and the underpinnings of the economy make it difficult to predict a property's value several months from now. 

If an appraiser hypothetically completed a $200M valuation in December, the historic metrics for deciding value would likely show the same property's value down by June because of the market disruption, Ware said.

But with this downturn more of an economic delay than a financial disruption, Ware doesn't believe true market value is lost, particularly when demand and supply were strong right before the crisis. 

“I use the word pause because to me the word pause is a positive adjective. It’s a pause,” Ware said of the economy. 

If there is one hidden boon in all of this madness, Ware, who specializes in office redevelopment, predicts developers may soon find opportunities to acquire assets at reasonable prices and to benefit from declining construction. 

“I do see a pause in new construction for office buildings from this point forward,” Ware said. “I think existing becomes much more valuable, which I, of course, like the empties. I don't like new construction.”