Property Valuations in Uncertain Times

ADAM M. LEVINE, CFA, CFP

Valuation plays a critical role in real estate, from appraisals for residential mortgages to the sales of commercial real estate. But the COVID-19 crisis and resulting economic uncertainty pose some challenges for valuation experts across the country.

Limited physical access

Site visits have long been an integral part of the valuation process, but stay-at-home orders blocked access to many properties earlier this year throughout the country.

Fannie Mae and Freddie Mac have recognized this hurdle by temporarily permitting exterior-only and desktop appraisals for eligible mortgages. Banking regulators allowed certain commercial and residential loans to close without having an appraisal completed, though appraisals have been required within 120 days of closing.

Savvy valuators quickly turned to technologies, like Google Earth, Street View and drones, to help fill in the gaps created by the inability to physically access properties. They are also taking advantage of online databases of municipality property assessment records to obtain necessary information.

Lack of comparable sales

Under the comparable sales method, valuators look at the sales prices of similar properties in recent transactions, making adjustments for differences between those properties and the subject property. It is debatable whether pre-COVID-19 sales can be considered comparable with post-pandemic sales, though. Moreover, deal volume for certain types of properties has fallen in many areas.

Valuators are looking beyond comparable sales and considering individual circumstances on a more granular level. This approach acknowledges that generalities are of limited value when COVID-19 may have different effects on different properties in the same neighborhood.

Tumultuous conditions

Essential data inputs for valuations are shifting constantly, sometimes daily. Unemployment numbers have been at historical highs, while interest rates have been at notable lows.

Businesses that were healthy months earlier have boarded up threatening the continued vitality of neighborhoods and increasing expected vacancy rates. Struggling tenants may have fallen behind on monthly payments. Governments are not only mandating rent relief, but also providing financial support to prop up troubled companies. Plus, operating costs may be higher to comply with health and safety concerns, as well as to adapt property use and features for changes in demand.

Valuators must address all these factors in their reports. But users of those reports must understand the limitations and consider obtaining fresh appraisals when fewer uncertainties exist.

Heart of the matter

2020 has not been kind to the values of many types of properties. But it is always better to have an accurate, data-based assessment of value than rosy, speculative estimates that do not pan out.

For more information, contact Adam Levine at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.

Four Ways That the Coronavirus is Changing Commercial Real Estate

ANITA S. WESCOTT, CPA

COVID-19 has upended the world and commercial real estate has not been immune from the effects. As offices, hotels, restaurants, and many retail stores and malls sat empty — and activity in warehouses escalated in response to the surge in e-commerce — COVID-19 radically altered the industry’s long-term expectations.

Here are some significant effects that are likely to linger, and how they could transform commercial real estate.

1. White-Collar Business Trends
   Many companies have found themselves operating in unprecedented ways to continue conducting business. For example, businesses that had been resistant to remote work were forced to turn to it. Those that have done so successfully may pivot to a smaller on-site workforce in the long run, reducing their need for pricey office space.

   The layout of office space likely will change, too. For starters, the trend toward open-space floor plans could come to an abrupt halt due to fears related to the spreading of contagion. Municipalities might introduce new standards for square footage per person, as well as the amount of enclosed space and HVAC. Air filters already commonplace in health care settings could be incorporated into office buildings.

   The change in business practices also could have repercussions for the hospitality sector. With business travel largely restricted, companies may have discovered that videoconferencing can be as effective as in-person meetings. And international travel might fall off if businesses increase their reliance on domestic supply chains (which could boost demand for warehouse and manufacturing space).

2. The Retail Shift
   The threat of e-commerce on brick-and-mortar retailers is not a new topic, but the pandemic may have accelerated the discussion. Stay-at-home orders prompted many people to shop online for items they had not previously, such as groceries, and many are expected to retain the habit.

   It is not all bad news. While the demand for physical stores continues to drop, the demand for the data centers that power online shopping and “last-mile” warehouses that facilitate quick delivery could grow. Some investors are already eyeing distressed properties, like big-box stores, that can be converted to industrial use.

3. Safety and Health Concerns
   The COVID-19 crisis has validated the fears of germophobes. Regardless of the property type, many tenants and buyers will have safety and health at the front of their minds. They will expect regular deep cleaning and sanitizing practices and the ability to “social distance” from others.

   Touch-free technologies — such as voice-activated elevator buttons, automated bathroom doors and motion sensors for faucets, soap and paper towel dispensers — are in the spotlight. Increased sensitivity to surfaces as potential carriers of germs also might drive a preference for spaces equipped with tools to move content from individuals’ personal devices to big screens viewable by more people without needing to touch wires or connectors.

   Designers may begin to employ antimicrobial materials more often for hardware and minimize tough-to-access (and therefore clean) corners or other places where pathogens can collect. Designers, urban planners and the like also need to keep in mind what could be a lasting aversion to “densification,” the dense occupation of space that had been growing in popularity in some areas.

4. Tenant Negotiations
   Tenants experiencing financial difficulties are looking to their landlords for lease concessions or rent abatements. It may be tempting to institute sweeping policies that apply to all tenants (no concessions for anyone or a 10% abatement for everyone). The smarter strategy is to make decisions on a case-by-case basis.

   Landlord decisions should not always be ad hoc, though. Landlords need to develop a decision-making protocol that factors in the tenant’s long-term prospects, renewal probability, default probability and building occupancy rate.

Do not wait

Owners, operators and developers cannot afford to take a wait-and-see approach to the coming changes for commercial real estate. Take action now to position yourself to thrive in the new landscape.

For more information, contact Anita Wescott at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.