To our Clients, Friends and CES Family
We at CES hope that this message finds you well. First, we want to assure you that your Virtual Appraisal Department is up and running at full capacity. We have contractors all over the country that are safely “Sheltering in Place,” plus our Atlanta management team is equipped with encrypted laptop computers to ensure security while working remotely. Our job management system is web based, so we do not anticipate any disruption to our services. A list of our direct lines that also forward to our mobile devices can be found on our website under “Our Team” page.
The question we have received most often over the last few weeks has been about property inspections. We have been working with our contractors, independent fee appraisers, and local authorities to establish safe guidelines for conducting business during these unique times with public safety for everyone being of our upmost concern.
It is important to note that a “personal inspection” is a term that is narrowly defined for appraisal purposes. Whereas a “personal inspection” is not required for appraisals under USPAP or FIRREA, it is usually required under USPAP to disclose whether a personal inspection was completed and the extent to which the property was inspected. For Evaluations an inspection is always required; however, to the extent of what level of inspection that is to be performed is left up to the institution holding the collateral. The Client and appraiser should define to what extent a property will be inspected, on a case by case basis, in order to achieve the most credible results.
As “your virtual appraisal department,” we are carefully monitoring every assignment to make sure that we always achieve the most credible results. To that end, we are encouraging our appraisers to supplement their drive-by inspections with a borrower’s or tenant’s provided interior photographs, marketing brochures, and virtual tours, when they are unable to access the interior of property due to risks of being exposed to person to person contact.
We have been receiving detailed and thoughtful analysis on all property types. We would like to share these resources with you. Please check back frequently for updates:
- STR – U.S. Hotel Results for week ending March 14.pdf
- STR – U.S. Hotel Results for week ending March 28.pdf
- CBRE – Updated 2020 CRE Outlook.pdf
- US Homeland Security – Essential Workers Advisory.pdf
- Rutter & Russin, LLC – Business Interuption Loss Insurance.pdf
- STR – Early March 2020 COVID-19 Impact on Hotels.pdf
- NCREIF – Valuation Committee Bulletin – COVID-19 – March 2020.pdf
- ASB – Appraiser guidance for USPAP and Property Inspections – March 2020.pdf
- Citi Bank Pandemic Response Regarding Property Inspections.pdf
Here are a few brief observations about the state of CRE:
- Hospitality assets have been impacted most severely, and the recovery is now expected to be greater than 12 months.
- Occupancy is expected to rebound before RevPar.
- Motorway assets should rebound quicker than coastal and convention areas.
- A decrease in gross income as little as 35% could push a hotel into the red.
- Value is expected to rebound before the underlying ADR, RevPar, and occupancy metrics because values are forward looking.
- While the impact on value cannot be measured yet, cash flow has been impacted. Asking rents in major markets have declined back to 4th quarter 2019 rates and are expected to continue declining for a few more quarters.
- Capitalization and yield rates have generally not moved yet. The dip in cash flow is expected to be temporary and values are generally forward facing.
- Over 10 million people filed for unemployment in March, causing a spike in the unemployment rate (4.4% as of 4/3/2020). This is grim for the economy overall, but multifamily is expected to benefit from those who prefer or must continue renting in uncertain economic times.
- While there has been a decline in RFP’s for new listings, active listings are still receiving attention. Deals in escrow are largely proceeding with closing.
- Leveraged private investors have been sidelined as lenders take a pause. The lack of financing will lead to a decline in sales volume in the 2nd
- Malls and food stall style locations are hardest hit by the social distancing measures
- Record numbers of employees are being laid off to stem the flow of red ink.
- As with the hotel industry, retailers are losing cash flow that cannot be made up. Many will not recover, especially the mom and pop businesses.
- Cap rates have generally not moved. Vacancy is on the rise and rent appreciation has evaporated for the 1st quarter of 2020.
- The industrial sector is generally expected to be a winner in this time of upheaval. Distribution of goods remains a key component of the global economy.
- Data centers and other IT related properties are also considered “safe” bets.
- There is renewed interest in domestic manufacturing, especially for medical equipment and other essential goods.
- Industrial properties related to the oil and gas industry are likely headed for a bust phase.
In closing, we would like to pass along some advice from insurance brokers. Businesses should be filing claims for interruption loss. The best and safest thing for a policyholder to do now is to submit a claim. It will likely be denied, but that gives the policyholder, under most commercial policies, two years to decide whether to file suit. The jury is still out on what costs, or how much will be covered; however, a claim will need to be filed with your insurance provider just in order to get the ball rolling.
Please stay in touch and by all means, be safe!
Kerry Reece, Chief Operations Officer, and the entire CES team.