Investing Education

Where the Private Real Estate Market Stands Six Weeks Into COVID-19


1,680 hours. That’s the amount of time sacrificed by our acquisitions team when we walked away from $241 million of private real estate deals on March 9, 2020, amidst market uncertainty. An overwhelming amount of data and information has since flooded the market, so we’re now looking back and evaluating how the private real estate market has changed over the last six weeks: was walking away the right call?

We actively track hundreds of private real estate deals, in addition to the deals we have under contract, at any given time. As these deals move through the transaction process, real time information for each is entered into our database of nearly 2,000 deals. On March 9, 2020, there were nearly 200 deals being tracked as active in our database. Since then, the COVID-19 pandemic and oil price drops dramatically impacted the economy and we’ve witnessed private real estate buyers take five main actions with the deals they were evaluating or had under way: pulling deals from the market, canceling contracts, putting deals on hold, continuing through the bidding process, or closing at or below the original price.

Below is the data we’ve tracked regarding each of these categories.

  • 1. Deals Pulled From the Market: One-third to one-half of deals that were marketed traditionally using brokerage firms were removed from the open market. Some were removed during the marketing process and others were removed once offers started coming in below the ask prices. We saw that 52 percent of our tracked core assets built in 2016 or later were pulled from the market. Two deals we were tracking in the Southeast region, both delivered within the last four years, were expected to have a highly competitive bid process with numerous submissions. Instead, both received far fewer offers than expected, with the best offers at 6 percent lower than initial pricing expectations. Both were subsequently pulled from the market. New transactions have been extremely limited as most brokerage firms are advising clients not to sell or bring deals to market right now unless they have an upcoming and unavoidable capital event. At Origin, we typically add about 15 to 25 new marketed deals per week to our tracking system; since March 9, we have seen a precipitous drop-off and are now only adding one deal per week, if any at all.
  • 2. Deals With Canceled Contracts: Like us, an estimated 20 percent of private commercial real estate buyers canceled deals that were under contract, often leaving millions of dollars of earnest money on the table to do so. A Dallas property we had been evaluating for the Origin IncomePlus Fund back in February was under contract for a cap rate 25 to 50 basis points higher than we typically see in that market. However, even with this below market price, the deal fell out of contract at the end of March, presuming it wasn’t seen as enough of a discount. We expect the number of deals falling out of contract to continue to rise as more buyers attempt to lower pricing with sellers who would rather hold than sell at a lower cost.Additionally, although the debt markets have bounced back from a total halt earlier this month, lenders are still being highly selective with new loan originations. Many buyers who were under contract and did not have financing lined up or were trying to negotiate with term sheets in-hand have fallen into this category by default. A spec office development in Arizona we tracked recently had all parties throughout the capital stack walk away from the deal. Although lenders are getting comfortable with office developments that are heavily pre-leased, the lack of future cash flow security at the project meant that it no longer met the capital markets’ newly highly selective criteria.
  • 3. Deals “On Hold”/Contract Extended: The most common theme among private commercial real estate buyers right now is trying to buy time, often literally, in order to gather data and make a more informed decision later. One example of buying time is a core profile deal we were previously evaluating in the southeast region. After the buyer failed to line up equity partners by April due to market uncertainty, they were forced to secure a contract extension by putting up even more earnest money. Whether or not this deal will secure funding, or the buyer will lose all earnest money is still unknown.Over 90 percent of active private real estate development projects have also opted for extensions with many land contracts also being extended and no new shovel-ready projects breaking ground. The experienced developers of Qualified Opportunity Zone sites that Origin was evaluating in Houston and Raleigh have both taken a backseat in hopes that demand normalizes or pricing decreases. As a side note, construction has been deemed essential in all Origin’s target markets so all projects that were already underway continue to move forward.That being said, future development pipelines are beginning to dry up. Chicago alone is expecting a 31 percent reduction of units delivered in 2021 from its peak of 5,404 in 2018, according to CBRE. Projects we tracked in downtown Phoenix, suburban Nashville and Charleston that were in early planning stages have been put on hold indefinitely. We predict this will impact construction pricing going forward and that demand for labor will decrease with the lack of new projects and supply chains normalizing.It’s important to note that whether a sale was pulled from the market or put on hold, both indicate that most buyers are unsure of current pricing and likely think it has decreased; data from the public markets and leaders in the private markets indicates that pricing in the private real estate market has fallen anywhere from 2 to 20 percent.
  • 4. Deals Continuing Through the Bidding Process: Some private real estate deals continued through the marketing process by offering virtual tours and additional online due diligence information. This was more common for value-add and workforce housing opportunities, particularly in Arizona, Florida and Texas. Origin does not invest in workforce housing, but of the value-add properties we tracked, only 20 to 25 percent were officially pulled from the market.A large 1980’s vintage value-add property in Arizona first hit the market in late February and called for offers a month later with no reduction in pricing guidance. Continuing to call for offers on- or off-market has also become a popular strategy for both buyers and sellers to gather highly sought-after information: real-time pricing data. Whether or not the 1980’s vintage asset actually sells or not, all involved parties will at least know the price (or pricing discount) that asset type and profile is trading for in the market today. Origin is enacting this exact strategy not only with deals we are looking to sell but also with the hundreds of deals in our database where the transaction outcome and pricing is still uncertain.
  • 5. Closing at or Below the Original Price: Five percent or fewer of our tracked deals completed transactions amid the market uncertainty. Initially, some buyers chose to honor the deal pricing they had under contract from earlier in the year and moved forward with those closings, especially if they already had debt secured. That sentiment has since shifted as more buyers are refusing to move forward with closings unless there is a price reduction which sellers have been hesitant to agree to.According to data from CoStar, the world leader in commercial real estate information, there have been about 50 sold private real estate deals since March 9; of these, nearly 75 percent are value-add, indicating that buyers still believed in the viability of the business plans for these assets. Two 1990’s vintage deals we had been tracking in the Orlando market traded this past week between a 4.30 and 4.60 percent cap rate with no COVID-19-related price reductions. Several core deals have also closed, with the buyer in most cases being foreign capital. One property in Phoenix that we tracked traded to an Asian investor at full asking price and a 4.30 percent cap rate in early April. Despite the continued strength of foreign capital flowing into U.S. private real estate, the lack of core profile trade activity reflects growth concerns in the future – buyers targeting yield will not be able to achieve that if there is zero percent or negative rent growth.

Our Conclusion as of Today

We believe we made the right choice in walking away from our deals on March 9 at peak pricing in the early stages of the COVID-19 breakout. A key component of being a leading real estate investment firm is the hard-earned skill of good judgement. Combining decades of experience with current market trends and conditions leads to clearer view of risk vs. reward. Our tracked data shows that, in a best case scenario, pricing on these assets could stay the same and, in a highly likely scenario, values are down between 10 to 15 percent from when we initially underwrote these deals in early 2020.

Additionally, although Origin was one of the first to walk away from deals under contract, we now expect re-trades and cancelled contracts to become part of the new normal. The predominant strategy for private real estate investment firms like ours today is to continue hitting the pause button on all new acquisitions unless presented with a heavily discounted price.

This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.