COVID-19 – Valuation Perspective


Jim Kutill, Integra Realty Resources – Chicago
Spring, 2020


Lenders, owners and buyers are all asking the same question. What is my property worth now that COVID-19 has hit? Right now, honestly, the best answer is – no one really knows.

As an appraiser, I thrive on data. We typically track actual sales over time in order to see trends. However, that historical approach is not possible right now because COVID-19 is still so new. So, we have to focus on following those who are in the market – the brokers, sellers, buyers and lenders – and weigh what they report they are seeing and experiencing.

Perhaps the most important variable in the impact on value of COVID-19 is property type. To take one obvious example, hotels have been impacted much harder than apartments. The Integra national response group has put together a position paper on the impact of COVID-19 on real estate. One point that is immediately apparent is the range of potential impacts on value depending on property type.

The following is a graph that shows the sensitivity of demand on the vertical axis against property economics on the horizontal axis, with COVID-19 as the variable. The more essential the use, the lower the impact on value. This is the difference between need-based properties (medical offices, data centers, housing) compared to discretionary properties (retail, gaming, office buildings and hotels).

Put another way, the further a property type is to the upper right corner of this graph, the more COVID-19 is hurting value. Based on our national surveys and rankings, the hit to value has ranged broadly from zero to twenty-five percent.

Apartments, i.e. housing, is certainly more of a “needed” property type than a “discretionary” property type. As you would expect, COVID-19 has had a lower impact on value via changers in demand for apartment properties than on many other property types.

This is not to say that there has been no impact on apartment values. The COVID-19 crisis has also been an employment crisis, with many people left jobless in its wake. To the extent your tenants can no longer pay their rent, your property is at least somewhat less valuable as an investment property. You can see on the graph that apartments are further out on the horizontal scale than medical offices, data centers, etc.

For those reading this article who have mixed use properties, the impact of the current crisis on your property value should be somewhere along the line you can draw between apartments and strip centers. The greater the percentage of income from commercial space relative to total income, the greater the impact on value is likely to be.

Cost of Capital/Liquidity

One other way to track what the impact on value could be is to track differences in the cost of financing real estate. Any of the members who’ve had an appraisal done may be familiar with the band of investment approach to determining a capitalization rate. Basically, a higher cost of financing (interest rate) and equity (the required return on investment risk) is equal to a higher required rate of return (capitalization rate). Cap rates and value have an inverse relationship. The higher the cap rate, the lower the value. Below is a matrix of the potential impact on capitalization rates as interest rates and equity returns increase:

As of now, the cost of debt is still reasonable, but individual investors have to answer the question of how much risk they are comfortable with now that COVID-19 is here.


So, where are we in this? If the subject is a proposed apartment property, and won’t be complete for 12 or more months, we don’t believe an adjustment is required. It is reasonable to believe that the property won’t reach the point of being in operation until the impact of COVID-19 has passed. Apartments have been an active and desired investment in Chicago for a number of years. Investors remain active in the market. While there may be fewer of them than before the crisis hit, those that remain are still very active. In our opinion, given the demand for apartment investment, the discount for the COVID-19 impact on cap rates would be in the lower end of the overall range displayed above.

For other properties, such as a shopping center, the impact is larger. But, even with retail, properties with more “essential businesses” versus businesses that have been shut down can be expected to suffer less from value declines. Finally, for those property types on the outer ranges of the scale, we have seen little market activity other than bargain hunters who are searching for distressed assets. The vultures are out there, but so far, it’s only on the weakest edges of the market.