Real Estate Market Conditions

August 31, 2020

Below are our brief observations on real estate market conditions in the pandemic environment. An overview of current market conditions is available by completing the form below.

REAL ESTATE CAPITAL MARKETS

  • Transaction Volumes. CRE (Commercial Real Estate) transaction volumes in the first 220 days of 2020 were down by 37% in the US, 19% in the EMEA and 40% in the Asia Pacific region, with the largest declines in hotels and retail, and industrial/logistics the most active
  • Valuations. Leading valuation and pricing indicators for July showed the pace of declines flattening with year-to-date pricing in the US and Europe down by 10.5% and 4.2% respectively, but with further weakening anticipated in the second half of 2020
  • Debt Spreads. AAA through subordinate tranches of CMBS (Commercial Mortgage-Backed Securities) are roughly in line with their 52-week averages with AAA spreads 240 bps inside their widest point experienced in March 2020
  • Secondaries. Trading for secondaries remains muted as the public equity markets rebound and a slowdown in capital calls limit selling pressure on LPs; intrinsic bid-ask spreads remain a factor until more substantial write-downs occur

REAL ESTATE OPERATING ENVIRONMENT

  • CMBS Performance. According to Fitch, CMBS defaults spiked to 16.5% in 2Q20, a level just below the 16.8% peak in 2013 with hotel (44% of the defaulting balance) and retail (42.5%) properties representing the most significant share – in July, 9.5% of CMBS loans were reported to be in special servicing, up from 8.3% in June
  • Multifamily. While fundamentals have remained strong, with the US national eviction moratorium and supplemental unemployment benefits expiring, occupancy and collection data for August indicate a likely deterioration of multifamily fundamentals – August rent collections reported by NMHC (National Multifamily Housing Council) are down 220 bps from June to 90% as reports continue of rising vacancy and falling rents in high-cost urban centers
  • Industrial. Long-term leases and increased demand for e-commerce distribution have sustained occupancy levels and rent collections and as such, average values are up by nearly by 20% year-on-year along with transaction volume
  • Retail. NAREIT reports a continued recovery in rent collections as stores have re-opened, with free-standing retail reporting 91% collections in July (up from 73% in April) and shopping center collections of 70% (up from 50% in April), albeit concerns persist over future performance as fundamentals in the general economy continue to deteriorate
  • Office. Similar to industrial, long-term leases and the lagging impact of the recession on businesses have sustained occupancy levels and rent collections, albeit concerns persist over an impending general recession and the future of office amid more widespread adoption of remote work
  • Other products. The hospitality and senior housing sectors continue to struggle due to the impact of COVID-19 on travel and the vulnerability of seniors to the virus in a collective living environment, while in some markets, student housing has demonstrated surprising resiliency with many owners reporting strong occupancy and collections despite wide-spread campus closures

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