If you are a real estate investor and either own or are interested in buying investment property, you obviously have a lot of questions you would like answered. The COVID-19 pandemic has wreaked havoc on every industry (including commercial real estate), with sectors like retail and hospitality being the most severely impacted.Yet, commerce does move on and real estate transactions do as well. So, let us take a few common questions and concerns that may be on the minds of investors today, particularly those who may be either on the buy or sell side of property in NYC.
It should be of little surprise that property valuations have declined since the onset of the coronavirus. Estimates of a 10% decline in retail values and 15% declines in retail rents have been widely reported*, obviously reflecting how stay-at-home orders, fear of the virus and social distancing have influenced industry pricing.
But it’s important to keep in mind that unlike the great recession of 2008 which was caused by a systemic failure in the housing and mortgage industries where it took years for prices to recover, we believe this crisis is likely to be much more temporary. With the Fed committed to providing liquidity to the markets and as our economy begins to open, may experts believe valuations will stabilize, creating a more normal environment to facilitate transactions between buyers and sellers.
The decision to sell an investment property is not always about the money. Owners may decide to relocate and recognize they will not be able to actively manage the property like before. Or they may simply have other financial needs and cannot wait to sell at the top of the market.
Sellers may also be wise to assess how much their properties have appreciated over time, rather than just looking at where current valuations stand in relation to the highest water marks. In many cases, owners may have already reaped the benefits of exceptionally strong appreciation through the years and may have the potential to profit handsomely even by selling in a slightly depressed market.
We believe most sellers will not have to deeply discount if the coronavirus proves to be a shorter-term rather than multi-year disruption. If the pandemic continues to interrupt the economy for a long period of time, then real estate valuations may decline further, but that will not be a situation unique to NYC, as the entire country will be unfortunate participants.
Winston Churchill is often credited with saying, “Never let a good crisis go to waste.” Commercial real estate investors may have that mindset today, especially those who have had their eye on investment properties in NYC for some time. Couple that with a pent-up demand where buyers have simply been unable to view, inspect, evaluate and ultimately, make offers on properties, and you have a recipe for a flurry of activity that is waiting to happen.
With lending rates expected to hover near historic lows for an extended period, we believe signs point to a rather vibrant transaction environment for real estate investors as soon as virus-imposed restrictions begin to loosen.
For NYC investment property owner’s intent upon selling, if suitable, the Delaware Statutory Trust (DST) continues to be an increasingly popular investment structure as a reinvestment approach that allows owners to defer capital gains tax on any property appreciation.
We have had many clients use the DST structure as an efficient way of completing their 1031 exchanges during this time when so many parts of the industry have been shut down making it difficult to view, inspect and identify replacement properties.
Because a DST already owns the investment property or properties, the due diligence and purchase have already been completed. Property management is already secured. And the leverage, non-recourse to the investor, has already been secured. For exchangers pressed to complete their exchange on time, DSTs can often be closed within a few days.
Please let us know if we can help address specific questions you have regarding investment property valuations or if you are considering a 1031 Exchange we can assist with.
*https://www.cnbc.com/2020/04/16/coronavirus-the-new-york-retail-real-estate-market-is-reeling.html
https://www.nytimes.com/2020/05/26/business/distressed-commercial-real-esate-coronavirus.html