Can appraisers accurately value CRE during COVID-19?

by Clay Jarvis21 May 2020

In an interview with the TreppWire podcast, Lonnie Hendry, vice president of commercial real estate product management at Trepp, shared with the show’s hosts his ideas around securing accurate evaluations of commercial properties while operating under the cloud of COVID-19.

Hendry, also a professor of Finance at Texas Tech, said one of the biggest challenges appraisers are facing is providing a view on a property that can actually be backed up with hard, timely data.

“That opinion has to be based on facts,” Hendry said, adding that the data used to calculate property values during periods of market stability – occupancy, revenues, cap rates and expense ratios – all come into question during a period like the current one, where sales are non-existent and comps from the last two months are largely worthless.

Are values down? Probably. But who’s to say by how much?

“I think we would all be short-sighted to say there’s been no impact,” Hendry said. “I think that the challenge is for the marketplace to quantify what that is in the short-term.”

Hendry suggests a few potential methods for generating accurate, defensible valuations. One involves treating COVID-19 as a short-term proposition and valuating the property as stabilized, but, as he explained, “we’re going to attribute some form of economic obsolescence to this short-term downturn in the marketplace.”

Another approach, which Hendry projects the market is currently in the midst of trying out, involves dividing a single year’s NOI by a property’s cap rate and strengthening that calculation with a discounted cash flow analysis, “where you look at maybe the first couple of periods of that discounted cash flow being very negatively impacted by losses in revenue and corresponding cash flow and then ramping up to stabilized operation over the remainder of the holding period,” he explained.

A third potential scenario involves collecting a comprehensive store of data that places a special emphasis on past downturns and the quantifiable impacts they had on the value of commercial properties. Once that data is collected, organized and analysed, it may provide some guidance for the rest of this pandemic – and even more for the next one.

But Hendry concedes that the unexpected force with which COVID-19 knocked the economy off-balance means most in the CRE evaluation game are flying somewhat blind.

“I also think this is an unprecedented event,” Hendry said, “to where you basically have a total market collapse across most asset types across the nation. And so logic has to come in as well to say, ‘Nobody really knows what the answer is in terms of where that stabilized market is.’”