Investors Expect Decline in Real Estate Values, With Rebound Predicted in 2021, Duff & Phelps Real Estate Advisory Group Study Finds

New York – According to a survey published today by Duff & Phelps, the world’s premier provider of governance, risk and transparency solutions, one in four commercial real estate professionals foresee some asset classes will no longer be eligible for funding as a result of the impacts of the COVID-19 pandemic. This finding suggests the economic effects of the pandemic may be too serious for some business models that rely on physical premises, further raising concerns for the retail and hospitality sectors, which is where approximately 89% of respondents expect to see the worst long-term damage for commercial real estate.

The survey, conducted by Duff & Phelps’ Real Estate Advisory Group (REAG), polled senior directors and investors in real estate from the U.S., UK, and Europe, and looked to gain insights into how different sub-sectors across the commercial real estate industry are adjusting as a result of the pandemic and examined the potential shifts in real estate financing.

Nearly half of U.S. investors (45%) expect commercial real estate assets will fall between 5-10% in value in 2020, which is slightly more discouraging when compared to the 39% of total respondents who expect valuations to fall between this range. However, over 90% of all respondents think transaction levels may start to move back to their pre-pandemic levels in 2021.

That said, as commercial real estate investors naturally begin to look elsewhere for assets that have proven to be more pandemic resistant, more than a third of respondents (36%) believe the industrial and logistics sector will emerge the strongest from the current crisis. This response correlates with the online retail shopping trend, increasing the need for larger distribution centers with better "last mile" facilities—logistics warehouses that carry out the final step of delivery.

Ross Prindle, Managing Director and Global Head of the Real Estate Advisory Group at Duff & Phelps, comments:

“COVID-19 has affected the real estate industry profoundly as transaction activity is down and many industries are in outright stress. Retail properties that have reopened have seen mixed results with some in premium locales faring well and others in secondary locations doing poorly due to ongoing restrictions on capacity and lack of foot traffic. However, the bright spots have been logistics properties and, unsurprisingly, properties occupied by businesses deemed as essential. As we work to make it out on the other side of this pandemic, logistics warehouses will become an increasingly desired investment opportunity as the preferred retail shopping method accelerates from brick-and-mortar stores to ecommerce.”

With economic downturns already confirmed in major markets, respondents across the U.S. believe the country’s economic recovery would take a U-shape (83%), rather than a V-shaped recovery. And, when asked about how the COVID-19 pandemic had impacted their own country’s GDP growth, nearly half of U.S. respondents (49%) optimistically saw damage to be minimal, between 1-5%, in contrast to those from Europe and the UK.

Despite the current volatility, U.S. lenders and investors offered an encouraging response when asked if the right valuation opportunity presented itself whether they could deploy capital when needed, with 78% responding yes. However, nearly half of U.S. organizations surveyed (45%) would require a discount of more than 10% to gain internal approval to acquire an asset.

Prindle added:
“Even as we head into the winter months, and the likelihood of a resurgence of  the virus remains possible, it seems investors remain optimistic of the opportunities to commit their capital in commercial real estate, an encouraging sign amid an uncertain future for a number of its sub-sectors.”

Notes to Editors
Duff & Phelps surveyed 325 senior directors and investors within the commercial real estate industry from the EU (54%), U.S. (25%), and UK (18%). Survey respondents worked for private property companies (38%), publicly listed property companies, including REITs (38%) and 14% were investment managers.

About Duff & Phelps
Duff & Phelps is the world’s premier provider of governance, risk and transparency solutions. We work with clients across diverse sectors in the areas of valuation, corporate finance, disputes and investigations, cyber security, claims administration and regulatory compliance. With Kroll, the leading global provider of risk solutions, and Prime Clerk, the leader in complex business services and claims administration, our firm has nearly 4,000 professionals in 25 countries around the world. For more information, visit www.duffandphelps.com.

Duff & Phelps’ Real Estate Advisory Group (REAG) provides comprehensive support in connection with commercial real estate investments and transactions, asset and portfolio management and optimization, financing and debt advisory.