Thursday, August 20, 2020

Meeting Change With Intuition

 

How do you make real estate decisions? Do you do it based on your feel for the market or are you data driven? Most investors I’ve spoken with over the years use a combination of the two. Some are more guided by “feel” and let the data confirm (or not) what they already believe. Others use data to drive them to markets and then use their “feel” to select the best property to meet their needs.

We use demographics to assess demand, we use market studies to assess supply (I hope you all rely on KeyPoint Partners’ GRIIDTM data) and we use leasing comps to gauge revenue potential. But what happens when historical data is no longer applicable to current markets?  Such is the case today, and it began in March as the country started shutting down in response to the Covid pandemic. Suddenly, the leasing comps we relied on from December no longer seemed appropriate for the deals we were working on in April. That STNL sale that closed in January – was it still a good comp for the property we listed in May? So what’s a real estate investor to do when historically reliable indicators no longer offer the reliability of the past? To find out, we spoke with several members of our local real estate community to gather their thoughts.

Aubrey Cannuscio, Partner/Chief Investment Officer at Linear Retail Properties, notes that “Linear has always made good use of market data in both its acquisition and leasing functions. Today, there is limited, critical data available to us and other market participants. There are few lease and sale comps which were negotiated and closed post-Pandemic and historical data is not as helpful as it used to be when analyzing investment opportunities.  Where are rents? Which tenants have paid their rent? Which tenants have acceptable credit? Our priority is to monitor the markets and collect current data (where we can) to support our valuation assumptions. Ultimately, investment decisions are based on an investor’s experience, access to data and instinct. The missing link today is post-pandemic data which is in limited supply.”

Jonathan Aron, KeyPoints Partners’ VP of Investment Sales, advises his clients, both buyers and sellers, to take a long-term view. “The value of a property is directly related to the long- term prospects for future income. While current metrics may have temporarily changed due to the pandemic, things will eventually return to a normal environment…or a reasonable facsimile thereof. Viewed in this context, historical metrics are still useful so long as their use is tempered by the current situation.”

Finally, for Michael Crawford, Senior Vice President at Rockland Trust, experience and feel for the market now have an outsized importance in underwriting as noted in his statement below: 

“Not unlike commercial real estate investors and potential purchasers, real estate lenders need to use data, such as rent rolls, cash flows, appraisals, etc... However, much of that data references a market, maybe from only a few months back, which might be far different than our markets today. No one can predict the future, but in the exercise of evaluating good value/bad value or acceptable risk in a loan, investors and lenders need to try to do just that. Most banks will tell you their lending windows are still wide open, but realistically, it depends upon the sponsor and the asset, which is a blend of product type, location, tenant mix and strength and lease maturities.”

Certain “facts” that we have been comforted by in the past have now changed. And no one knows if/when they will return to past “normalcy”. Lenders have always relied upon a mix of experience, analysis, and intuition to get comfortable with the risk profile of a loan. Today, however, a lender’s experience has become critically important as we have less relevant data to rely upon.” I asked Mike if he was aware of any lending institutions in the area giving their lenders new underwriting criteria and he was not aware of any doing so.

All in all, for those of us who consider ourselves to be data driven, during this time of rapid change, we are finding ourselves to be more reliant upon intuition and feel than we might normally be. 

Mark Becker, Partner/CFO,

MBecker@KeyPointPartners.com.


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