The spread of COVID-19 is impacting all industries and markets — including the appraisal space. That said, appraisers should avoid making long-term assumptions about the impact the virus will have on real estate values.
According to the Appraisal Institute, the current environment is fluid:
- An important part of any appraisal assignment is an analysis of market conditions. The coronavirus threat may be impacting market conditions. However, in most markets, it is not yet clear to what extent, if any, market conditions are affected. Related, complicating factors include fluctuations in the stock market and changes in mortgage interest rates.
- Market analysis includes observing market reactions. This analysis becomes more complicated when market participants themselves are facing uncertainty.
- Appraisal reports should include a discussion of market conditions and should mention the coronavirus outbreak and its possible impact. However, it is not appropriate to include a disclaimer or extraordinary assumption that suggests the appraiser is not taking responsibility for the analysis of market conditions.
While it is important that multifamily appraisers do not jump to conclusions and make long-term predictions, we must understand the different ways in which COVID-19 is currently impacting the commercial real estate market. It is also important that we understand how the virus impacts the appraisal process so we can better communicate with our clients.
Our team at Apprise by Walker & Dunlop has compiled a list of four appraisal-related factors that are, or could be, affected by the coronavirus:
A Change in Multifamily Property Expenses
This should come as no shock: there will likely be an increase in cleaning expenses as additional sterilization methods are employed by apartment property managers in the foreseeable future. Keeping residents healthy is of the utmost importance, which means common spaces still in use — such as elevators and laundry facilities — need to be cleaned with a much higher frequency. Many common areas such as fitness centers and community rooms have been closed in recent weeks but will require more frequent sanitizing as they reopen.
Legal costs may also increase. Depending upon long-term unemployment numbers, landlords could see an increase in legal costs in 2020 as they work through the eviction process and impact of the new COVID-19 relief regulations.
A Change in How Multifamily Inspections are Conducted
In light of the pandemic, the CDC has indicated that the best way to prevent illness is to avoid being exposed to the virus. In our opinion, an interior inspection unnecessarily increases the risk of exposure to the inspector as well as to the residents and staff. Our recommendation: Exterior inspections only. If interior inspections are deemed necessary and the client or ownership representatives request that we view interiors, then we inspect common areas and vacant units only, avoiding occupied units.
In our opinion, an exterior inspection in conjunction with recent photographs/video tour provided by ownership as well as an analysis of the historical actual rents and occupancy trends provide an adequate representation of the subject property’s physical condition. As such, in most cases, this level of inspection is sufficient to produce a credible appraisal report and assists the nation with preventing the spread of the virus.
A Change in Income
Our current surveys indicate that more apartment renters are likely to renew their leases as they are less inclined to go through the cumbersome moving process in today’s environment. This means there could be less of an opportunity for owners to increase rents to full market levels in the event they are lagging. This could also mean, however, less downtime and reduced turnover costs.
There could also be a short-term increase in credit loss and/or bad debt. We are hopeful, though, that a stimulus package from the federal government could mitigate at least some of the risk here, depending on the longevity of the isolation period.
A Change in Overall Multifamily Market Activity
In the near term, we are fully expecting that multifamily investment transaction volume will sharply decline until authorities lift self-isolation and present a path forward for testing and control of COVID-19’s spread.
On a positive note though, we believe reduction in the new construction pipeline will benefit existing supply in the future. Early or planning stage deals may not come to fruition, which could help markets that had already been struggling with oversupply. This reduction in supply, in turn, would lead to an increase in occupancy and rental rates in select markets that were beginning to experience softening.
— By Meghan Czechowski, the Valuation Lead for Apprise by Walker & Dunlop and Managing Director of the Midwest Region. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.