Commercial Real Estate Values Drop 24%, While Fed Rate Drops to Near Zero
The COVID-19 Coronavirus has had a massive impact on nearly every sector of the U.S. economy, and commercial real estate is no exception. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%.
At Janover Ventures, we are neither doctors nor economists (and cannot reliably predict the future) but we can say that this could be quite an attractive time for cash-rich investors to purchase commercial real estate. This is partially due to the drop in prices and partially due to the substantial drop in interest rates. For one, 10-year treasury yields are incredibly low, and the Fed cut its benchmark interest rate to nearly 0%, while in many cases CRE debt is priced at even less than it was just a few weeks ago.
Of course, purchasing and financing any asset isn’t without risk, particularly at such a volatile point in the market. Depending on how the market plays out, commercial real estate values may fall even more in the coming weeks. However, lenders (which are still actively doing business at the moment) may be spooked if values fall much further.
For all types of commercial properties, a certain number of tenants are likely to fall behind on their rent during this period, making it difficult for borrowers to pay their monthly mortgage payments. This is particularly a concern for retail borrowers, as restaurants, stores and businesses in many major cities have been required to close. This is an even greater concern for asset classes that have already been struggling in recent years, such as B and C-class malls, many of which already face occupancy issues. In addition, with corporate work-from-home measures becoming more commonplace every day, both borrowers and lenders may be concerned about both the short and long-term viability of office properties.
And, while treasury yields are incredibly low, this doesn’t exactly mean that it’s a free-for-all for borrowers. Fannie Mae® and Freddie Mac® Multifamily recently increased floors and spreads, while banks and other private lenders may be decreasing leverage allowances due to market volatility. For instance, a bank offering a 70% LTV loan just a few weeks ago may now only be comfortable offering 55%.
We're living through a period of uncertainty, but here are a few things we can rely on. Markets are cyclical, and things will get better-- we just don’t know how and when (yet). At Janover Ventures our advice is to stay safe, wash your hands, and follow all government health protocols. If you’re interested in purchasing or refinancing commercial real estate, read up and stay informed. And if you have any questions or concerns, please feel free to email our CEO, Blake Janover, at email@example.com.