How Property Valuations are Happening During Covid

The Covid-19 Valuation Equation

Since the start of the COVID-19 crisis and ensuing economic fallout, the commercial real estate market has, like the rest of the economy, experienced its share of disruption. While the most obvious fallout was reduced demand for certain product types—such as retail and office, resulting in buyers seeking deep discounts in order to trade in these products—others, such as multifamily and industrial deals, have seen steady demand and pricing.

While transaction volume has increased for residential properties and some commercial product types, the overall volume of commercial transactions has generally decreased. Nonetheless, our approach to valuing properties continues to use a solid approach that adjusts value based on a combination of factors.

Historical Data

As seasoned brokers, we track the recent closings and have up-to-date and historical data on average prices per square foot in specific locations. We are also attuned to the cap rates associated with various assets and their movement related to various factors, including market conditions.

Recent Closings

While transaction volumes may have decreased, many transactions have closed in 2020. These were either deals that were already under contract pre-COVID or properties that were put under contract and closed during the past ten months. Many of these transactions represented 1031 exchanges, while others were sales of the popular product types mentioned above or of the less-popular products selling at a discount. All of these closings have provided a good amount of comparable data.

Owners’ Opinions

Most, if not all owners of properties track the market and usually have a good idea of the value of their assets. However, in the case of a sudden change in market conditions, a lag develops between owners’ expectations and actual market prices. We are typically interested in hearing an owner’s opinion so we can take it into consideration and use it as a baseline that we will adjust upwards or downwards.

Buyer Demand

Our constant engagement with buyers and sellers, and our tracking of recent closings, allows us to assess the demand for different properties and determine if they should be priced at a premium or a discount.

Economic Conditions and Market Sentiment

Recent sales data and closing activity, added to buyer demand, help us form an opinion about the market activity and sentiment. General economic conditions as reflected in interest rates, the job market, mortgage default rates, governmental regulations impacting potential future tenant evictions, treatment of property taxes etc. and other data points help us complete our understanding of the market conditions and impact our pricing assessments.

Valuation Decision

Once we have compiled all the items listed above, we reconcile the various findings until we form a realistic picture of the value of a property. The decision to market the property at a particular price is based upon hard data plus soft information tied to market sentiment. The ultimate marketing price is always made in coordination with the owner of the real estate.

Most owners defer to our pricing recommendation, which forms the basis of our marketing price. One of the challenges we are, however, observing in today’s market is the gap, for some assets, between owners’ higher, rear-view price expectations and our updated pricing. One of the ways we have accommodated owners’ expectations is by testing the market at their expected price with the understanding that a price adjustment might be needed down the road. We have also encouraged buyers to write offers at their desired price and have been successful in negotiating a compromise price and terms acceptable to both buyer and seller.

Despite the reduced transaction volume and changes in demand, we continue to list (and sell!) properties based on tried-and-true methods adapted to the current circumstances. If you are interested in selling your property or getting a free evaluation of its worth, please contact my team today.

By Mary Alam, EVP/Principal