The Challenges of Retail Property Valuation During COVID-19

Tom Lagos

After a COVID-19-induced lull, our team has been increasingly approached by a number of multitenant shopping center owners interested in an estimate of value and marketing plan for their assets. While I am not an appraiser, valuing properties is an important component of the many hats I wear. I depend on frequent interactions with buyers, sellers, colleagues, and daily market information to advise on real-time property valuations. I also rely on experience and gut instinct as much as comparable sales sets and data. So, while valuating properties is a common practice during “normal” times, today it is a more daunting one.

The fallout of a worldwide pandemic had never factored into this process before in our lifetime. Moreover, according to CoStar, since March 11, 2020, there have only been 14 retail property transactions over $15 million in the Western U.S., compared to 59 transactions over the same period in 2019.

Our team of professionals was challenged to rethink our once-effective model based on data and experience. Here are some of the adjustments that we came up with: 

1. Sharing the risk by handicapping rental rates against various time frames.
2. Assigning risk to the income stream of each lease and capitalizing the net income accordingly (similar to the way credit ratings assign risk to a CMBS debt tranche).
3. Adding a few hundred basis points to the property on top of what it would trade for before the pandemic.

All of these and other strategies are viable considerations, but can values be determined based on assumptions the market may not accept?  

A market on hold

We are also presented with related challenges as well. There is currently no reliable debt source to properly underwrite expected cash flows. Even with the 10-year Treasury at an all-time low, lenders are having a hard time assessing retail property risk, and the quotes we receive from financial institutions that are actively lending in today’s market (CMBS and life companies are not active) are not reliable due to their constantly changing and stringent lending standards.

Additionally, we are at an impasse on the sell and buy sides, since there is plenty of equity sitting on the sidelines waiting for greater yielding opportunities to hit the market.

Meanwhile, shopping center operators are in no rush to sell as they feel they have addressed their collections issues. A number of major retailers are reporting record month-over-month sales numbers over the past 60 days, while others file for bankruptcy. 

Finally, many are waiting for another potential stimulus package out there that will once again distribute trillions of dollars into our economy, while patient investors are looking for genuine distress before they begin to seriously look at retail again.

So, circling back to the burning question from buyers and sellers: How do you value shopping centers during COVID-19 times? There is no certain answer.  What I do know is that history has shown us that these economic troughs do not sustain for long. Soon the debt markets will provide attractive lending rates, the spread between debt rates and cap rates will prove wider than ever, and investors will come back to get their yields and accept that retail is not ending, just continuing its evolution.

Tom J. Lagos is an executive director at Institutional Property Advisors.