This post is co-written by Gary Van Cleve, Mitchell Simonson and Josh Folland
This unprecedented time of pandemic has brought social interaction to an abrupt halt with cautious open-up just beginning. Americans have had to learn to live, work, educate their children, recreate, shop and otherwise transact business—all while social-distancing, self-isolating and not being physically present. Despite these radical changes, the business of America carries on, somehow, someway, including commercial real estate appraisal work. How has COVID-19 affected the appraisal process and the values of the various markets and submarkets of commercial real estate? What changes will there be, if any, to the appraisal and valuation process because all aspects of our society are being forced to carry on their daily activities differently while trying to protect ourselves from a sometimes debilitating, sometimes deadly, always mercurial virus with no known cure?
Early indications present some sobering numbers with respect to commercial real estate transactions. For instance, 11-county Twin Cities commercial real estate sales for the first quarter of 2020 had a volume of 504 units with a total value of $1.718 billion. Second-quarter 2020 sales nose-dived to 229 units with a total value of $943 million.
Retail properties fell off a cliff in Minnesota between the first and second quarters of 2020. In the 11-county Twin Cities area, 174 retail properties closed in the first quarter and only 45 retail property sales closed in the second quarter.
While we certainly do not pretend to have all the answers, we see some patterns and trends amid all the uncertainty. COVID does not seem to be affecting all property types and all property locations equally. In fact, it appears at this point that the impact of the virus seems to be both property-type dependent and location dependent. Places where the virus has not hit quite as hard do not appear to have suffered as much in terms of real estate transactional volume and pricing impacts.
With respect to property types, quite clearly restaurant, retail and hotel properties have been hard hit. The Trepp CMBS Delinquency Rate declined in August to 9.02% after peaking at 10.32% in June. For reference, the all-time high was 10.34% in July 2012. Notably, the lodging (22.96%) and retail (14.88%) sectors are being hit the hardest, while industrial, multifamily and office delinquency rates have hovered around historical levels.
Office properties present interesting issues and raise interesting questions. Will office workers return to work full-force at some point? Will some employers decide that their organizations work just as efficiently (or more efficiently) and more cheaply by keeping some, many, or all their employees working from home post-pandemic? Will some employers decide they need more office space for their organizations in order to implement social distancing and to keep their workers safe? A Cushman Wakefield national survey of law firms recently revealed that 72 percent of those firms surveyed believe that they will need somewhat less or substantially less space in the future and that 15 to 30 percent of their jobs may be eliminated. Moreover, many major national employers such as Facebook, Amazon, Capital One, Amazon and Zillow, are extending work-from-home for their employees either into the fall or for the rest of 2020.
Pandemic or no pandemic, we all must live somewhere. Indeed, because of the pandemic, our homes have become more important than ever—having become the exclusive place for us to be safe while we try to live, work, “go to school” and entertain ourselves. To date, professionally-managed multi-family apartments are enjoying high levels of renter payment. According to the National Multifamily Housing Council’s Rent Payment Tracker, 92.1 percent of apartment renters paid their rent as of August 27th. This is a 1.9-percentage point decrease from the share who paid rent through August 27, 2019 and compares to 93.3 percent that had paid by July 27, 2020. This statistic is based on data covering 11.4 million professionally-managed apartment units. The Minnesota Multi-Housing Association surveyed owners of about 34,000 apartments in June with favorable reports that more than 9 of 10 renters have been meeting their rent payment obligations to date.
This could well be, however, the silver lining of the cloud. Over half of renters have at-risk wages because of the pandemic and live in single family or small multi-family rentals with two to four units. It is likely that federal relief has been propping up the rental payment numbers. The $600 weekly federal enhancement to unemployment benefits will end on July 31, unless Congress acts to extend it or provides some other form of rent relief payments. One indication of buyer expectations becoming increasingly cautious in the multi-family market is that one commercial real estate broker has reported eight multifamily deals that have been sidelined recently.
As buyer expectations decrease, seller prices will also have to decrease if “normalized” real estate sales volumes are ever to be reached. Property owners that have good standing with their banks and good cash flow will not see the need to meet buyers’ lower expectations. The massive unemployment we have seen has put the country in a recession; accordingly, it seems likely that price expectations of property owners will start to fall and align more closely with the lowered buyer expectations that are already being seen.
About the Authors
Gary A. Van Cleve is a seasoned trial attorney and an appellate advocate handling a full range of real estate-related litigation. Gary focuses on representing property owners in: (1) condemnation actions where either the government or a utility company takes private property for a public use through its power of eminent domain, (2) land use disputes with local governments typically involving zoning or permitting issues, and (3) property tax appeals. Gary is the chair of Larkin Hoffman’s real estate litigation practice group.
Mitchell Simonson, Founder, Simonson Appraisals
With a wide range of commercial appraisal experience and real estate consulting, Mitchell Simonson’s 16 years of experience, knowledge, and ‘boots on the ground’ attitude are invaluable assets that have helped countless clients make smart business decisions. As owner and founder of Simonson Appraisals, he leads the firm in delivering credible valuation services for financial institutions and attorneys specializing in the areas of condemnation, property tax appeal and estate planning.
Josh Folland, Senior Managing Director, Valbridge Property Advisors