While we were posting about property valuations last week, a very timely piece appeared in the NYT on Saturday (What could kill my New York bookstores, by Sarah McNally) about, among other things, vacant storefront properties lying idle for long periods of time. It was eye-opening to many people (as self-reported in the comments to the article) who do not understand how property is underwritten and valued. Furthermore, the article was a commentary on more than the monetary value for the communities in which these properties lie – there is definitely a community impact when property after property is idle, especially over long periods of time.
As an experienced underwriter and due diligence researcher, I had already identified underwriting as requiring re-assessment in the face of the pandemic and its economic impact. The resulting valuation adjustments are just part of the picture, however. Deb Bartlett, business and communications strategist, is also looking at the broader messaging inherent in the reality of vacant storefronts.
No one doubts that many retailers’ businesses have been significantly hurt by the lack of foot traffic, operating protocols for social distancing and sanitary rigor, as well as general uneasiness within the buying public whose habits have now also been shifted to online consumption and other pandemic-required habits.
But there is value in having vibrant neighborhoods with vibrant, relevant retail as well. They contribute to the stability and desirability and yes, value, of their location.
So, should a component of property valuation be “social” value? Or how a vibrant retail presence adds value to the buildings it’s in, as well as the neighborhood? And how is that counted in the actual underwriting of the property or neighborhood?
Additionally, does allowing retail space to remain vacant confirm an implied artificial income? Both landlords and lenders should be asking the critical question: Is the underlying credit actually there? What is the financial “depth” of the vacant space? New circumstances require attention to dimension. What is the true asset structure? Will it survive the current economic crisis? Can (or how) can the underwriting be conservative without being fearful?
Susan and Deb
From our “Conversations About CRE” Series … an ongoing consideration of all things CRE with colleagues passionate about what’s happening now, and how we can help each other through this!
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The authors of this article have been employed by the following in their tour of corporate CRE: Smithy Braedon, The Oliver Carr Company, Real Estate Recovery, The Kaempfer Company, Lowe Enterprises, Trammell Crow Company, CBRE, Cushman & Wakefield and WeWork. Links to more detailed info about us are presented below.
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