Posted on September 10, 2020
LPA Leverages Its CRE Market Expertise And Industry-Leading Technology To Research The COVID-19 Pandemic’s Effect On Property Values Across Texas And The Southwest
The United States has weathered a dozen recessions since World War II. However, the financial crisis brought on the novel coronavirus is unlike any we’ve ever experienced. It has brought the economy to standstill seemingly overnight.
Although commercial real estate (CRE) has held its value better than other asset classes during previous downturns, it has not been immune from COVID-19. Deals have been put on pause as buyers, sellers, and lenders step back to reassess the market. Consequently, the flow of sales and rent information (or comps) has slowed to a trickle. As Mark Lowery, LPA’s CEO and President, puts it, CRE valuation experts currently have “almost no post-pandemic data points” to analyze.
This data gap has made the appraisal process both more arduous and less efficient. COVID-19 has forced appraisers to rely more heavily on interviews with market participants to measure transaction frequency and volume. Although the intelligence gathered during these interviews has value, it also has real limitations. Being subjective, it cannot serve as a guarantee of accuracy to the same extent that comps can. “Interviews are anecdotal, and the numbers reported in any given interview are generally not statistically meaningful,” Mark explains.
Having recognized this data gap, our organization mobilized to fill it. We started by identifying the most pressing questions currently facing CRE appraisers.
- How is the market slowdown impacting the value of specific property types?
- How are economic conditions affecting business’ net operating income and, by extension, cap rates?
- Have stay-at-home orders, business interruptions, and record unemployment led to significant changes in occupancy rates?
- When do brokers, lenders, appraisers, and other industry stakeholders in the industry believe Americans will be out of quarantine and back to work?
- Despite the market uncertainty created by COVID-19, have CRE professionals recently heard any good news, observed any positive developments, or been presented with any unique opportunities?
- How can valuation experts quantify this prevailing market sentiment?
We ultimately decided that the best way to answer these questions was via a survey instrument. In conjunction with the questionnaire itself, we built a technology platform to ingest, synthesize, and analyze the resulting data points. On the front end, our web development team created a user-friendly landing page that allowed survey participants to describe their experiences in the field. On the back end, our software engineers linked these survey responses to a database housed on our internal server.
We then kicked off an extensive outreach effort. We knew our data set would be compromised unless we could secure the participation of a large, representative sample population. Our leadership established various incentives — from friendly competitions to bonus programs — to encourage team members in every LPA office and at every level of the organization to spread the word about the survey’s availability throughout their professional networks.
We ultimately collected over 1,000 data points. Under the direction of LPA Manager and project coordinator Drew McFarland, Associate Jake Allen led the effort to analyze this data. Summer Interns Samantha Graves and Cassidy Springer assisted with this process.
Next, our creative team began brainstorming how best to present the results of our survey. The preliminary results reported by Drew, Samantha, and Cassidy indicated that data visualization would be an optimal way to demonstrate COVID-19’s dramatic, real-time impact on the CRE market. Yet the responses we had received also contained several stories compelling enough to warrant inclusion in our final report. Additionally, we knew we wanted this report to be brief and tightly focused on the most actionable pieces of business intelligence we could derive from the survey responses.
After further discussion regarding layout, formatting, and delivery methods, we prepared a template that would allow readers to extract the most value from the insights contained within the report. “Our clients expect us to provide them with accurate and up-to-date opinions of value for their commercial real estate collateral,” Mark says. “The fact that we’re in the midst of a black swan event that has sent shockwaves through every industry hasn’t led to any lowering of those expectations. So we were extremely pleased when we saw the fruits of our labor on this project. We immediately realized that we had something quite special on our hands — a statistically meaningful, highly applicable set of data covering a wide geographic area.”
Our Southwest COVID-19 Survey Summary Report is now available as a free download. Whether you participated in our survey or not, we invite you to review its key findings, factor them into your own planning and CRE portfolio management efforts, and share them with your fellow decision-makers. We also welcome any feedback you may have about the report.
As efforts to safely reopen the economy enter a new phase, we will continue to augment our research capabilities. Later this year, we will release custom survey reports for each of the major Texas markets in which we operate. We’ll also be conducting a second round of interviews focused on our industry’s recovery from the financial toll taken by the pandemic. Finally, we’ll be expanding to a new market — El Paso — and surveying its CRE experts.
In closing, we’d like to express our gratitude to everyone who helped make this research project a success. To the members of our LPA family: thank you for stepping up with energy and fortitude. To our fellow CRE professionals: thank you for your willingness to participate in our survey and the generosity of your responses. And, to our clients: thank you for letting us continue to serve you.