Appraising in a Pandemic

by | 01 April 2021

Colliers Capital Markets sat down with Paula Thoreen, Executive Managing Director and Institutional Valuation Leader of Colliers Valuation & Advisory Services, to get her insight into the challenges of appraising property, particularly retail, in today’s environment. Below are takeaways from our conversation.

Colliers Capital Markets (CCM): Which subsectors of retail are holding up and which continue to struggle?
Paula Thoreen (PT): Grocery-anchored retail continues to hold up well, with most rent relief requests well behind us. Collections are running in the 97%-plus range. Community and neighborhood retail centers — which includes grocery — are faring the best of all retail. Areas that continue to struggle are malls, cinemas, gyms — we expect to see more bankruptcy filings in these categories — as well as fine dining. We have also seen development properties struggle to lease up, as tenants were more cautious about leasing retail in 2020 until they got a better feel for the duration of COVID and changes to their business as a result.

CCM: Which submarkets or regions of the country are showing more strength?
PT: The Sunbelt continues to attract interest. National Council of Real Estate Investment Fiduciaries (NCREIF) data indicates that the Mountain and Southwest regions of the U.S. fared much better than other regions over the past year.

CCM: Did values decrease in 2020, and what was the aggregate impact?
PT: On the institutional side, NCREIF reports that retail values declined about 7.5% overall in 2020. Value declines for all retail types were higher in the Midwest, at 11.5%, and the East, at 7.7%. For retail subtypes, neighborhood retail fared the best at a less than 1% decline, and super-regional malls declined the most at near 11%. Declines are due to more conservative short-term DCF assumptions and not rates. Cap rates and discount rates have not declined for neighborhood and community centers. Looking to the early part of this year, many of our retail clients are watching market rent to see if there is tenant resistance to renewals at pre-COVID rates. Across asset classes new tenant leases will be telling and a stronger indicator of market conditions. Concession-driven renewals have kept occupancies up in many locations and have postponed potential vacancy and adjustments to valuation.

CCM: Are any valuation clients discussing selling assets in 2021?
PT: Most of our retail clients are not sellers at this time but are looking for strategic buys and finding them in some areas. They do, however, continue to reevaluate their portfolios and centers that are not achieving projected growth.

CCM: Has there been an uptick in lender-related valuations?
PT: We did see a bit of an uptick in the second and third quarters from institutional lenders who wanted to see if there were any tangible COVID impacts on the value side. We also saw industrial funds wanting to track value increases in their portfolios, which were up substantially during COVID due to the major shift to online shopping — industrial cap rates continued to compress, while rents keep pushing higher. Industrial is moving so quickly, with Amazon a driver in so many markets, that valuation has to stay ahead of the curve.

CCM: Are lenders putting pressure on appraisers to be extra-conservative on valuations?
PT: This is a very timely question! We are seeing both sides — lenders who would like to be more conservative and those that would like to try to mitigate any drop in values. Our appraisers need to be thoughtful about the asset type, the location, and trends we are seeing at a macro, market, and micro-market level. We certainly ask our clients/owners more questions about the performance of tenants and the centers as well as about any trends they’re seeing in the market. We have to remember that COVID is a short-term event.