The chasm between commercial property buyers and sellers widened in the third quarter due to the Coronavirus pandemic, putting a strain on sales. However, when it came to cap rates, investors found stability, according to a new survey from CBRE.
While 6% of buyers expected discounts from pre-pandemic prices, just 9% of sellers were willing to offer such price breaks, the research said. Further, revised criteria for purchasers are emerging. Investors are placing greater importance on tenant credit quality, which was cited by 85% of respondents, and both length of remaining lease term and building occupancy—which each came in at 64% of respondents—than they did prior to the pandemic.
“Buyers and sellers remain apart on many asset types, especially value-add where the bid-ask spread remains wide,” said Chris Ludeman, global president of capital markets. Uncertainty about how to underwrite net operating income will remain until the pandemic is under control. Cap rates have remained relatively stable and in fact have gone down for the best industrial and multifamily assets. There is no shortage of equity capital, both foreign and domestic, targeting real estate and debt markets are increasingly accommodative.”
However, CBRE stated in its report, investment volume is down substantially, across all property types, compared to pre-COVID-19 levels. Within a year, about two-thirds of survey respondents said, investment activity will recover to pre-pandemic levels. The most bullish sector is industrial investors, with almost 90% expecting activity to return to pre-pandemic levels in that time frame, with multifamily close behind at 84%.
Meanwhile, cap rates for Class A properties showed little difference by August from their end of 2019 levels. The largest share of markets reported flat cap rates (except for retail), while the rest reported increases or decreases of between 25 and 50 basis points. CBD and suburban office had the most markets (each about one-third) reporting cap rate increases. Suburban multifamily had the most markets (33%) reporting cap rate decreases.
Also, the firm noted, “A majority of survey respondents expect cap rates to remain unchanged through year-end 2020, as the cautious resumption of investment activity will continue to delay extensive price discovery.”
“The bad news in the COVID-19 era is that current and projected NOI are at risk, causing a pause in investment activity for most commercial real estate assets,” added Spencer Levy, chairman, Americas research & senior economic adviser, in a cap rate commentary. “The good news is that cap rates have remained relatively stable.”
Further, he said, “The number of signed confidentiality agreements has risen sharply. This demonstrates that equity capital markets are deep and liquid, which will counteract much of the broader market risk and volatility.”