AUTHOR: John Meyer, SRA, GAA, John Meyer Appraisal Company
Randall Bell – author of Real Estate Damages has some interesting observations – For the profession of appraising, that is founded on researching historical market data and trends, there is simply nothing to reference. There are few sale comparables, paired sales, capitalization rates or literature that relates to the topic of modern pandemics and real estate values. Most studies of detrimental conditions have impacted a single property or region – this is the first world-wide event that has crippled the global economy. The real estate market moves slowly. The ripple effects have yet to be seen.
All disasters have three stages – the assessment, the repair and the on-going phases – we are in the assessment phase, but we may still be assessing the assessment.
There are three types of recovery – a short V, a long U and an L. Bell says that from studying detrimental conditions since the 1980’s, in most markets he expects a V recovery, where distressed owners sell and drive the market down, followed by a steep recovery. Some are forecasting a W shaped recovery, somewhat similar to seasonal ups and downs, if COVID re-emerges and the economy pauses again. No matter the type of recovery there is light at the end of the tunnel.
In the commercial markets, those REITS and landlords who have good management and proper reserves will go through this relatively unscathed. He predicts cap rates will likely surge about 2 points due to distressed sellers. Distressed players will go away while blaming the coronavirus, however they likely were on thin ice anyway.
From a recent Co-Star survey, Office leasing is beginning to rebound but still down from previous years. A study regarding planning for the reimagined workplace shows a significant increase in the number of employees working from home 1 year after COVID-19. Buildings with elevators present a significant challenge due to limited capacity requirements. The premium rates the CBD’s currently experience could be difficult to continue. The greatest remote preference is a hy-bred of at home and at office. According to the CEO of Blackrock he feels a maximum of 60-70% of their employees will need to return to the office. This has to impact demand at some point. We are blessed to have the Medical Mile activity we do, which was recently improved even more with the announcement Perrigo was moving into a new facility they will build downtown just off Michigan. Medical offices currently lead the commercial real estate industry, with rent collections at 99.8%, in spite of some tenants having faced challenges amid the banning of elective procedures.
Bankers I talked to have stated the small guy, highly leveraged, may be in trouble, but the original panic seems to have diminished. In general, they stood back and watched for the first three months with no new loans, but are now back looking for business – lower interest rates have certainly helped.
Again, the reoccurring theme is ‘Property and Location Specific” regarding impact, with good locations and quality tenants not significantly impacted at this point.
Retail seems to be the most difficult area, although again “Property and Location Specific” is key. Nationally it has been hard hit – published sales data shows lower incomes but creeping up after July, primarily from on-line sales. E-commerce was approximately 13% prior to the pandemic and 18% now. E-commerce is growing quickly and taking demand away from on-site shopping.
Slower recovery from malls that are designed for crowds which is not good now. 50% of all closures are coming from malls even though they make up only 10% of all space. The expectation is mall vacancy will rise by at least 4% which will impact its value. Malls will also have a slower recovery while neighborhood and community centers should hold up.
Restaurants – could be tough going and 61% of the closures are likely permanent!
Quick Service Restaurants (OSR’s) has seen an increase of 30 basis points in cap rates nationally compared to past years, with corporate leases basically unchanged. Many OSR’s are looking to downsize their sit-down stores and look for drive-through sites. There will be a bifurcation between corporate/large franchisees and smaller franchisees as a flight to quality continues.
Bankers have mixed emotions about retail – many stated they are not seeing enough data yet and some appraisers are making 5-10% downward adjustments on some properties. Sit down restaurants are hardest hit and if they make a loan, they are looking at a 12-month period to stabilize the income. Another said retail was a flip of the coin – national tenant restaurant would be okay. Smaller mixed tenant facilities would depend a lot on the owner, local, amount of leverage, etc.
Most fast foods are still paying – PPP helped and deferments are good through 12/31/2020 with no consequences and no downgrade of the assets on their books. In March 40% asked for deferments and that is now down to 15%.
Industrial seems to be holding up fine and actually improving. The Grand Rapids area is growing pretty rapidly and our diversified industrial base has proven to be a very positive factor.
Multi-family continues to be a significant factor in new construction and resales are good, with some paired sales showing significant increases from previous years. The demand for these facilities is boosted by the lack of inventory of single-family homes and the builder’s inability to keep up with demand, especially in the lower, entry level price ranges.
We are blessed to be in the West Michigan area at this time, as the infection rate on this side of the state is substantially lower than the state as a whole. Let’s hope that continues and a vaccination is developed soon so we can move past this current situation.
John A. Meyer, SRA, GAA
John A. Meyer Appraisal Co.