Research report

Three reasons CRE property values have remained resilient

CRE property values usually decline during economic recessions. Learn what’s different this time, and how it could impact the next expansion.

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January 27, 2021 | 10 minute read

Despite an ongoing pandemic and economic recession, valuation gauges for the commercial real estate (CRE) market have remained impressively resilient. We offer three key factors that have contributed to this seemingly paradoxical reality. Additionally, we analyze how the durability of property prices informs prospects for future performance.

Key takeaways
  • Overall CRE property values have remained impressively resilient in the face of the pandemic and economic recession.
  • Sales of distressed assets, which can send broader market values downward, have so far been missing.
  • Government support has been crucial in buttressing the economy and has made the COVID downturn fundamentally different from previous recessions.
  • These factors have turned the normal CRE cycle on its head, and investors should consider the impacts on the next expansion.

At its core, commercial real estate is a cyclical market. Demand for property is directly correlated with economic activity, including personal consumption, business investment and travel. Consequently, while the magnitude of any decline will vary based on a variety of factors, CRE property prices generally go down during economic recessions.

Just as it has been in so many ways, the COVID-19 crisis is turning out to be an exception to the rule. Major gauges of property values continued to rise in 2020 despite an extreme economic dislocation and mobility restrictions that have had outsized effects on certain types of activities. Both indexes that use a transaction-based price formula (such as the RCA CPPI) and those that use appraisals (NCREIF ODCE Index) indicate that property values have remained impressively resilient, while Green Street’s more forward-looking metric initially declined but has since partially recovered. Indeed, if you were to look at 2020 performance data without context, you might ask whether there was a recession at all. Some have used this resilience, along with the incredible performance of U.S. equity markets, as evidence that financial markets have become increasingly untethered from the real economy. We posit that there are unique factors that can help explain the valuation dynamics in the commercial real estate market during this unusual “cycle.”

Valuations have remained resilient during COVID crisis

Source: Real Capital Analytics, NCREIF, Green Street Advisors, Macrobond, FS Investments, as of December 31, 2020.


This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Matthew Malone, CFA

Managing Director, Real Estate

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