CBRE: Pricing ‘Disconnect’ Weighing on CRE Activity

A new CBRE survey finds a “wide disconnect” on pricing expectations between buyers and sellers as the COVID-19 pandemic weighs on commercial real estate investment activity.

CBRE, Los Angeles, said 61 percent of buyers are looking for discounts from pre-pandemic prices while only 9 percent of sellers willing to offer such discounts. Among buyers looking for discounts, nearly three-quarters were for office or retail properties. For suburban offices, 95 percent of investors sought discounts, with no sellers willing to reduce their price.

“Buyers and sellers remain apart on many asset types, especially value-add where the bid-ask spread remains wide,” said CBRE Global President of Capital Markets Chris Ludeman. “Uncertainty about how to underwrite net operating income will remain until the pandemic is under control.”

Ludeman said cap rates have remained relatively stable “and in fact have gone down for the best industrial and multifamily assets,” despite the pandemic’s disruption. “There is no shortage of equity capital, both foreign and domestic, targeting real estate and debt markets are increasingly accommodative,” he said.

As for investment sentiment, CBRE said one-third of respondents are underwriting with the same rental income assumptions they used in the first quarter, with the remaining two-thirds adopting more conservative assumptions. Half of those with unchanged underwriting assumptions are industrial-focused respondents.

Investors are placing greater importance on tenant credit quality (cited by 85 percent of respondents), length of remaining lease term (64 percent) and building occupancy (64 percent) than they did prior to the pandemic, the report said. Nearly two-thirds of respondents said they believe investment activity will recover to pre-pandemic levels within a year. Industrial investors are most bullish on the recovery, with nearly 90 percent expecting activity to return to pre-pandemic levels within a year, followed by multifamily investors (84 percent).

Capitalization rates for Class A properties as of August differed “minimally” from rates at year-end 2019, CBRE reported. Most markets reported flat cap rates (except for retail), while the rest reported increases or decreases of between 25 and 50 basis points. Central business district and suburban offices had the most markets (each roughly one-third) reporting cap rate increases. Suburban multifamily had the most markets (33 percent) reporting cap rate decreases.

Most survey respondents said they expect cap rates to remain unchanged through year-end 2020, as the cautious resumption of investment activity will continue to delay extensive price discovery.

“With the market still cautious, most of the cap rate compression recorded is not a reflection of rising asset values; instead, assets are being underwritten with lower year-one income assumptions, resulting in lower cap rates,” said CBRE Global Chief Economist Richard Barkham. “Even so, values have been surprisingly resilient, given the nature of the economic shock so far. While liquidity and investor sentiment remain strong in many segments of the market, values will ultimately be pressured by the ongoing challenges from COVID-19. The relative cap rate stability so far, versus prior cycles, provides some reassurance in an otherwise difficult market.”