The sudden shutdown of the economy has created immediate uncertainty in forecasting CRE property valuations. As a result of the shutdown property sales have come to a halt and property values will certainly decline as a result. According to Green Street Advisors the value of publicly traded REITs fell 34% between February and March.
There are many unique issues suddenly hitting real estate and it will take some time before we understand the full impact on valuations. REIT pricing may be an initial indicator of how much CRE values may fall. As Green Street reports the sudden decline in REIT valuations suggest a 20% decline in property prices. We forecast that many property CRE types will experience a fall in excess of 20% as effective rents decrease due to increased concessions; vacancies and collection losses increase; net operating incomes decline and capitalization rates rise.
David Shulman, senior economist at UCLA Anderson school of Business recently stated:
“No one knows what pricing is right now. How do you value a home right now? How do you value a regional mall right now? The market is very uncertain at this time and no one knows how to value anything. On the topic of mortgage forbearance, “If it was an individual bank lending to an individual borrower, it would be easier. In a securitized world, it becomes very hard to do forbearance. Freddie and Fannie said they would do forbearance, but I don’t know how the investors expecting interest payments get paid on the other end. That is what happened in 2008 and 2009, so we are dealing with the same issues.” Servicing debt will strain many property owners.
Going forward the demand for many types of commercial property space will not bounce back to levels seen prior to the pandemic. The historic low capitalization rates the market has experienced over the past several years due to low cost financing has expanded the debt level of many properties. As capitalization rates begin to rise the reevaluation will significantly impact price levels.