Post-Pandemic CRE Valuations Could Improve As Early As 2021

Post-pandemic commercial real estate valuations might improve as early as 2021, Nareit Senior Economist Calvin Schnure said Monday during one of the organization's REIT Report podcasts. 

That is a major turnaround from a few months ago, when the relatively few properties on the market were trading at a discount, Schnure said.

"Real estate is hanging in there," he said. "We saw rent collections increase as businesses opened up. One of the concerns in the market is whether there will be longer-term impacts on the demand for commercial real estate. ... We've seen recent news on valuations that suggest they are more stable than a few months ago."

As for CMBS, DBRS Morningstar predicts that investors can expect pandemic-related valuation losses will be below that of the last downturn, even though properties backing loans that were sent to special servicing since March have suffered an average value decline of 24% since their origination.

"As the U.S. struggles to contain the coronavirus disease (COVID-19), retail and hotel assets have seen their values slashed, even as retail spending and leisure travel have rebounded," the report notes. "While regional malls and limited-service hotels face the steepest declines, other property sectors are faring better and more conservative underwriting since the 2008 financial crisis should temper losses." 

DBRS Morningstar analyzed 284 CMBS-bundled loans totaling $9.79B that ended up with a special servicer and whose collateral properties were reappraised since March 1. 

Of those, only about 17% have an LTV of 100% or higher, pointing to a value deficiency of about 3.8% of the total principal balance, the company found. By contrast, there was a 9.5% loss rate on CMBS loans during the Great Recession.

Despite such glimmers of hope for commercial real estate valuation, industry executives are still worried. In a survey of 325 commercial real estate executives worldwide published in October, Duff & Phelps found that 83% of the U.S. respondents thought the country would see a U-shaped recovery from the recession rather than a quicker, V-shaped one. 

The survey found a consensus that CRE valuations will suffer in the near future. Some 39% of respondents expect valuations to fall by between 5% and 10%, while 31% feared a heavier impact. Asked when valuations might start to return to their pre-pandemic levels, 90% of respondents said 2021.