Real Estate Market Conditions

August 4, 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

  • Debt capital markets have become more active with numerous CMBS primary issuances, banks and non-bank lenders back in action, albeit not for all product types (i.e. hotels and retail) and with more conservative leverage levels and terms
  • Debt Spreads. CMBS AAA spreads are only 23 bps wider than pre-COVID-19 levels and nearly 240 bps inside peak spreads in March 2020
  • Transaction Volume. CRE transaction volume is down by 30% in the US, 13% in EMEA and 40% in the Asia Pacific region, with the largest declines in hotels and retail, and industrial/logistics the most active
  • Valuations. While we expect reported values to continue to lag fair value, reported core GAVs through June are down by 5% to 10% YTD across US, UK and European diversified portfolios with the largest declines experienced in retail and hotels which are down by 15% to 20% (RCA, June 2020) and ~25% (Greenstreet) respectively – industrial and stabilized multifamily valuations are expected to remain the most resilient and the office sector outlook is mixed
  • Secondaries. Trading in the secondary fund market remains muted as the public equity market rebound and a slowdown in capital calls have combined to limit selling pressure on LPs (RCA, June 2020) and intrinsic bid-ask spreads remaining a factor until more substantial write-downs emerge

REAL ESTATE OPERATING ENVIRONMENT

  • Massive government stimulus spread across employers, consumers and capital markets has blunted the impact of the economic slowdown on real estate fundamentals across most sectors, excluding hospitality, however market data is beginning to show evidence of the impact of the economic contraction on landlords
  • Industrial. Long-term leases and increased demand from e-commerce distribution have sustained occupancy levels and kept June rent collections above 90% – we expect there to be continuing strong prospects for space absorption
  • Office. Similar to industrial, long-term leases and the lagging impact of the recession on businesses have sustained occupancy levels and June rent collections above 90%, however, we expect widespread adoption of telecommuting and struggling co-working operators to reduce office space demand in future periods
  • Multifamily. Second quarter US apartment vacancy rates held steady at 4.8% (REIS, June 2020) buoyed by supply constraints caused by construction delays, eviction moratoriums, unemployment benefits and government stimulus payments – rents were down by only 40 bps in the second quarter, and collection rates remained strong at ~93%, however certain urban coastal markets, such as San Francisco, reported more substantial declines
  • Retail. Reported retail vacancy of 10.2% remained flat in the second quarter (REIS, June 2020), with widespread retail bankruptcies not yet reflected in reported occupancy – open ended fund rent collections increased from ~50% to ~60% (NCREIF, July), likely due to early re-openings of economies which could reverse in future periods as COVID-19 cases rise
  • Other products. Hotels are suffering severe distress due to steep declines in travel, and niche sectors such as student and senior housing are contending with the operational challenges of COVID-19 on their residents, while data centers and self-storage are experiencing countercyclical demand and valuation uplifts

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All data as of July 30, 2020 unless otherwise stated

 

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