HOW FAR HAVE REAL PROPERTY VALUES DROPPED?

UPDATE MAY 11 – I think I mentioned in a prior post that about 1/3 of all restaurants are expected to close and stay closed.  Alternative use for those will be interesting.  Also, the expectation is that 20% of hotels may not reopen.  The almost unanimous alternative use is affordable housing.  That is probably a win-win for the housing industry (more supply in the much needed lower price range) and hospitality industry (lower supply in a future world of lower demand).

APRIL 30 – Although it will likely be 3-6 months before we have closed transactions that were negotiated during the COVID-19 crisis, that doesn’t mean real property values haven’t already declined.  Key indicators are available that provide an indication of how much prices have likely declined.  Reduced asking rents, increased vacancies, increased cap rates, and lowered list prices are among the indicators that we can analyze.

Based on my analysis of these key indicators, I believe prices have already DECLINED as follows:

5%-10% for residential, 10% for apartments, 50% for golf courses, 30% for hotels (economy 20%), 5%-10% for industrial, 20%-30% for office, and 25%-35% for retail.  Obviously, these are general figures and specific properties can be doing better or worse.  It is likely another 5% to 10% decline over the next year will occur.
One exception exists to the above…A flight to quality is occurring worldwide.  U.S. Treasury Bonds and the U.S. Dollar have been beneficiaries during this crisis.  In real estate, Net Lease properties appear to be the only property immune to a decline in value.  However, the Net Lease market appears to be bifurcated.  Most of the investor interest is directed towards corporate tenants that have top tier credit ratings (Moody’s – A3 and better; S&P – A- and better).  These properties are experiencing cap rate compression and thus higher prices.  At the other end of the spectrum are corporate tenants with credit ratings in the B’s.  Analysts are forecasting that 40% of corporate bonds rated investment grade will be lowered to junk status.  These properties are subject to negative price adjustments as credit ratings are lowered and cap rates rise accordingly.
Hopefully, appraisers are applying Market Condition adjustments to all sales and adjusting the various factors in the Income Approach accordingly.  It is no longer acceptable to use a 0% Market Conditions adjustment or the excuse that transactions aren’t available so it is not possible to know what has occurred.
As I have preached for 10+ years, Germany has performed Mortgage Lending Value appraisals for 120 years without using sales transactions.  When the American appraisal industry started in the 1930s it didn’t base Market Value on sales transactions either.  Appraisers do not need comparable sales to know what Market Value is currently.
Best of luck out there.  Stay safe.
The Mann