23 Oct

Since Covid-19 began, real estate experts have seen major changes in business and execution of contracts. At present, some cities and states have paused transactions for real estate. Apart from that, market prices are being monitored as there is a difference in views as to how real estate pricing will fare during the pandemic. Some are expecting a downturn, while others feel that there will be minimal effects on how commercial real estate is priced down the line.

With that said, this is how Enriched Real Estate views the movement of real estate values in the era of the pandemic.

How Real Estate Reacts to Major Financial Fallouts

In the Covid-19 era, how can we understand “value” to make wise investment decisions both now and in the future? Will those decisions be based on the “old paradigm” or the new, unknown post Covid-19 paradigm? Following are material factors to consider:

Real estate experts around the world are attempting to understand the impact Covid-19 will have on all aspects of human activity “post-Covid-19”.

Yet, how is this possible given its unprecedented nature in a highly advanced global economy? In the real estate market how can we understand “value” to make wise investment decisions both now and in the future?

Will those decisions be based on the “old paradigm” or the new, unknown post Covid-19 paradigm? What will be the magnitude of the value loss? How long will recovery take? Just as importantly, how can investors be sure of “value sustainability” in real estate after seeing such a value decimation on Wall Street in two to three short weeks?

Archstone, in a unique collaboration with the National Council of Commercial Real Estate Fiduciaries (NCREIF), Archstone Appraisal Group, Enriched Data, and Value Expose sought to answer these questions from a variety of viewpoints.

Historical Perspective of Real Estate Values During Economic Fallouts

The unprecedented economic fallout from the COVID-19 pandemic prompted our team to study previous market corrections for guidance on how to value commercial real estate moving forward.

After analyzing the Great Recession, post 9/11, Dot-Com Bust, Real Estate Crash of 1990, market corrections of the 1970s and 1980s and the Great Depression, we concluded that the Real Estate Crash of 1990 is the most analogous prior period because:

  • It was widespread,
  • There were no bailouts, and
  • Overall, it took five to seven years for the real estate industry to recover.

Recession Recovery Timelines

We rejected comparisons to the other market corrections for the following reasons:

  • Great Recession: Not analogous due to the fact that it was largely focused on the Wall St/finance industry. Post-crash, there were also massive corporate bailouts that are not likely this time. Such corporate bailouts virtually eliminated any financial pain for individual asset owners, many of whom survived due to “extend and pretend” measures. Market values were not fully reset to market but were, in effect, allowed to maintain much of their pre-crash value.
  • Post 9/11: Not analogous due to the fact that it was a one-time event, and largely a “local” tragedy (NYC Metro; DC Metro). Recovery period? A two-to-three-year period was needed.
  • Dot-Com Bust: Not analogous due to the fact that it was concentrated on only a few industries. Recovery period? Again, a two+/-year period was needed.
  • Prior “Market Corrections” in the 1970s/1980s: Not analogous due to the fact that these were largely underwriting issues on the debt or syndication side. Recovery period? Again, +/-three years was needed.
  • Great Depression: Not analogous due to time gap, level of financial engineering capability (tools) now available, and completely different key industries today. In the 1930’s, the US was largely an agricultural/manufacturing economy. Today, it is primarily “services”-oriented.   That said, unemployment in the past 30 days is now past 15%, and still climbing. It is the largest increase since the 1930’s and more than 50% above the “Great Recession” level, the second highest unemployment cycle.

What Does This Mean for Commercial Real Estate?

In succeeding articles, we will analyze how we expect real estate values change in relation to historical events related to economic fallouts. Since the current state of the market is most similar to the 1990 economic fallout, we will look at that data as well as current data to compare and project what is to come in the coming year for commercial real estate.

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