Special Report

Capital Alert

COVID-19 Crisis Triggers Valuation Challenges

Capital Alert
September 25, 2020

The coronavirus pandemic is creating a challenge in asset valuations amid declining transaction volume. As a result, a significant divergence has emerged between the public and private markets.

For example, the NCREIF NFI-ODCE index, which tracks the private market, has returned 1.01 percent year to date, compared to a drop of 13.30 percent for the NAREIT Index. The former may reflect the closing of pre-COVID transactions, or the fact that many lower-quality deals aren’t getting to the finish line, while the latter is more a function of stock prices than underlying asset values. Investors are motivated by historically low interest rates and a record pile of equity to deploy – more than $160 billion, by one report. Money is also being raised on the debt fund side of the equation, for example, Blackstone’s record $8 billion fund, which closed this month. Some sellers – a number of whom were well-positioned heading into the pandemic – have adopted a wait-and-see attitude, while others are bringing assets to the market. Price discovery varies widely by asset class and sub-market.
A significant divergence in valuations has emerged between the public and private markets.

Pricing also tells a story about which asset classes are prevailing in the COVID-19 crisis, though it can vary widely based on the location. But on average, prices for industrial assets rose by 8.3 percent in July compared to the year-earlier period, while multifamily increased 6.9 percent, according to the Real Capital Analytics CPPI. By contrast, retail fell 2.8 percent and office 0.9 percent. A faster business cycle and changing workplace is driving a desire for more flexibility and shorter leases by office tenants. That could eventually benefit co-working firms, a trend illustrated by the recent alliance between C&W and Industrious, which has 100 locations in 50 cities.

The apartment sector is facing new headwinds amid shrinking household growth. For the first time since the Great Depression, a majority of 18- to 29-year-olds are now living with their parents. Some are leaving costly major metropolitan markets such as San Jose, Los Angeles and New York, which are also challenged by negative net absorption of new units. Meanwhile, rent collections have softened a bit from the prior month, with 90.1 percent of households making a rent payment by September 20, according to the National Multifamily Housing Council. Separately, the difficulties in the hospitality sector were underscored this week by the foreclosure action against the owner of the storied Palmer House Hilton in Chicago, and the closure of three major hotels in Manhattan, including the Hilton Times Square.

Despite all of the turmoil created by COVID-19, lenders continue to fund well-capitalized borrowers with high-quality assets in strong geographic markets. We are seeing rates of 2.60 to 2.85 from both Fannie Mae and Freddie Mac, utilizing the benefits of the Green Mortgage Loan products. Life company interest rates range from 3.1 to 4 percent with LTVs of 65 to 70 percent, though some deals are transacting in the mid to high 2 percent range for best-in-class product. Banks, credit unions and CMBS are falling in the range of 3.25 to 4.25 percent. Some debt funds have retreated, though a few continue to consider deals at rates ranging from 3.5 to 4 percent.

Marcus and Millichap Capital Corporation is continuing to close loans across all asset classes, leveraging our premier network of lender relationships across the U.S. Please reach out to an MMCC advisor for guidance on all your capital markets needs.

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