Real Estate Capital Scoreboard® – November, 2020

Chicago, Illinois, November 1, 2020 – Over the past decade, property pricing by sector remained steady and predictable.  Pricing remained tight, with nearly all classes of institutional assets showing minimal risk/spread premiums. Today, the real estate industry offers a tale of different pricing levels for diverging sector performance.  Lodging, office, and retail heavily suffer from the pandemic due to a lack of predictable cash flow.  On the other hand, capital continues chasing multifamily and industrial assets at an unabated pace.  As the final months of 2020 approach, notable capital trends include:

Private capital remains very active in searching for opportunities.  Investors scrutinize public funds, as many such companies show realty assets values below privately-owned asset pricing levels.  Such discrepancies create new acquisition opportunities, resulting from ongoing market corrections in various asset classes.

Considerable divergence of costs between urban and suburban markets, especially in coastal markets, focus more on buying assets in the suburban markets — the more substantial the pricing differential, the more attractive the suburban investment alternative.

Cap rates drop with interest rates for core properties.  However, JV and more structured deals widen by 100 basis points, or more, as more uncertainty looms.  Finance and equity markets are very efficient.  By some estimates, as much as a 40%-discount in pricing may occur if stressed property types lack recovery.

Unlike previous market cycles, the pandemic, not capital markets, drive changes.  Underwriting risks appear more challenging as the next few months remain uncertain, at least until a vaccine or other significant favorable virus developments occur.

Mr. John Oharenko, founder and director of The Real Estate Capital Institute, advises, “The ample supply of capital and demand for selective realty assets assures transaction volume will be strong as interest rates and limited alternative opportunities exist.”

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