As the last few states move toward the process of a multi-phased re-opening, and business resumes, we are beginning to get a grasp on what the future commercial real estate market will look like. Up until the Coronavirus hit, the real estate market was one of the strongest we have seen. But, as predicted by CoStar, the world leader in commercial real estate information database, distressed properties will be the product in demand in the coming months. As of now, distressed sale properties are few and far between as people are holding on to what they have not wanting to realize that property values have declined.
As reported by Costar, The Federal Reserve recently released its latest semiannual stability report that projected commercial real estate may undergo a “substantial repricing.” The Fed declined to say how much of a repricing but noted property values were already elevated, which increases the risk of steep declines.
According to costar.com, “Current sales volumes are smaller compared to February before the pandemic wreaked havoc on capital markets. The $15.1 billion in sales reported in April was down about 70% from February’s volume of $55.9 billion, according to CoStar data. That trend is continuing this month. The properties trading now are generally the better quality, cash-flowing ones. That phenomenon is evident in sales pricing per square foot or per unit. Industrial properties are getting sold at per-square-foot prices 22.5% more than year-end 2019 rates. Office properties going at prices 26.3% higher; multifamily, 3% higher. Only retail property prices are down from the pre-COVID-19 prices, down 14.2%.”
People are looking for stability at a time like this, so deals that cash-flow will continue to be very attractive. On the flip side of that coin, now is a great time to take advantage of depressed pricing and distressed sales could be on the rise. CoStar estimates that there could be $146 billion in distressed sales in 2021 and 2022. It is possible that projections could even exceed what we saw happen in 2008 with the Great Recession when CoStar recorded $176 billion of distressed sales over an eight year period.
“Historical CoStar data shows that when distressed sales flood the market in a short time period, properties are liquidated at prices not only much lower than their outstanding loan balance, but also much lower than the market value of similar properties in the same location. Properties could sell at an average of one-third of their pre-coronavirus value, according to a CoStar analysis, which is similar in severity to the Great Recession,” according to CoStar.com.
Who knows exactly what the future markets will look like after an unprecedented event such as COVID-19, but looking to the past, distressed properties seem to be a safe bet as the market beings it’s climb back up to the top where it was pre-pandamic.
Sources: costar.com [Article] https://www.costar.com/article/147645783/distressed-sales-from-pandemic-could-exceed-volume-of-great-recession