Question No. 1: Many offices and retail spaces are empty, the ability to pay rent is being strained by the COVID-19 shutdown, and we appear headed for a long-term economic slowdown. What do you see as the economic and market forces at play that will have a significant impact on real estate values?
Matt Malone, managing director, real estate, FS Investments
The speed with which this outbreak has impacted activity has been unprecedented, and many uncertainties remain. Rental income, particularly from more exposed sectors, such as hospitality and retail, has come under immediate pressure. However, it is important to remember that coming into 2020, the commercial real estate market appeared relatively healthy — lenders have been much more conservative compared to the prior crisis. This strong starting point, combined with government intervention, should lend support to the space. Sector selection, along with capital structure and liquidity, will be important in determining the winners and losers on the other side of this disruption.
Brett Moody, chairman and CEO, Moody National Cos.
We are in a time of unprecedented market inefficiency as a result of the COVID-19 pandemic and a lack of purchasers in the marketplace. This has created an opportunity to acquire assets from undercapitalized companies at a significant discount to replacement cost and historic norms. We anticipate a long-term flight to high-quality assets within major activity centers as many workers in satellite locations reposition their offices at home. Technologically advanced assets located within a high concentration of market activity will thrive.
Annie Del Giudice, client engagement specialist liquid real assets/alternatives, DWS Group
The real estate landscape is drastically different post-COVID-19 and recessionary repercussions will vary by sector. We are monitoring the rate of change of new COVID-19 cases in the United States, where testing has lagged, along with other signs of market health such as the VIX, credit spreads, breakeven inflation, real interest rates, and the prices of copper and oil. The impact will range from severe long-term damage to cashflows (i.e., retail, hotels) to minimal disruption in sectors exhibiting strong growth (i.e., industrial, data centers). Healthy sectors could be revalued higher, while the worst sectors could face sizable recapitalizations.
Keith Lampi, president and COO, Inland Private Capital Corp.
While no single commercial real estate sector has been immune to the pandemic, we have observed a wide spectrum of performance. Bright spots include self-storage, residential and necessity-based retail, while nonessential shopping centers and hospitality assets have experienced dramatic impact. In time, we will see how recent and near-term performance impacts property values; however, pricing friction between buyers and sellers would translate to a near-term decline in transaction volume rather than a rapid decline in valuation. Currently, the investment market is embracing the flight to quality trend, meaning well-located assets with historically strong performance in sectors with strong operating fundamentals appear to be holding value.
Jeff Keitelman, co-managing partner and co-chair, national real estate group, Stroock & Stroock & Lavan
Two things come to mind. One is asset class. Hospitality, retail and some residential has been and will remain incredibly adversely affected. Office is still a bit of a wild card. Tech, health and industrial (e.g., supply chain, distribution warehouses) should be okay and may even trend upward. You may also see a resurgence in manufacturing and agriculture as, over the longer term, the country seeks to limit its dependence on the production of critical items outside of the United States and shorten the time it takes to get them where they need to be. A second factor to consider — which ordinarily would be the main news story and is less than six months away — is the presidential election. With a left/center presumptive nominee and the decimation of the economy that was one of the key underpinnings of the President’s re-election strategy, it’s possible that there will be a change of administration and party. Historically, this has had significant impacts on real estate values.
Question No. 2: The SEC is proposing a rule to modernize fund valuation practices. The rule would require a board to assess and manage material risks associated with fair value determinations; select, apply and test fair value methodologies; oversee and evaluate any pricing services used; adopt and implement policies and procedures; and maintain certain records. The SEC’s comment period extends through July 21. What input would you offer to the SEC?
John Harrison, executive director, Alternatives & Direct Investment Securities Association (ADISA)
The SEC acts with the good intention of investor protection, and we’re all thankful for that. With this question of fund valuation, two issues: “fund” covers a lot of territory, so it would be hard to paint them all with the same brush. And even more important to know is what problem this new rule is really trying to solve. On a more granular level, ADISA would certainly be able to organize a task force to develop and advise on guidelines, especially around the more illiquid products that our constituency handles. After all, that’s part of what associations do.
Anthony Chereso, president and CEO, Institute for Portfolio Alternatives (IPA)
Uniformity, consistency, transparency and frequent review of best practices in valuation techniques are essential to the evolution and growth of our marketplace. The SEC’s proposal is a good first step in providing clarity regarding a board of directors’ responsibilities related to valuation processes. It’s also encouraging to see the SEC propose a clearer definition of “readily available” for determining whether a fund should use market quotations in its valuation determination. As it determines a final rule, the SEC should consider endorsing specific guidance as a way to achieve a flexible and standard methodology for determining fair value, especially if the SEC is contemplating the withdrawal of previous guidance the industry looks to as common and understood principles of fair valuation.