6 minute read 17 Jul 2020
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How COVID-19 has impacted real estate value considerations

By EY Americas

Multidisciplinary professional services organization

6 minute read 17 Jul 2020

Impact and change in cash flow assumptions, property-level discount rates and terminal capitalization rates

The impacts of COVID-19 on the global and national economy are far-reaching and well documented.  In this environment, the valuation of real estate, a highly subjective endeavor in normal times, is made more arduous by the absence of real-time data — a direct impact of the near shutdown of the real estate leasing and transaction markets for most sectors beginning in March.

The data that does exist provides mixed signals — the National Council of Real Estate Investment Fiduciaries (NCREIF) Index, which tracks core property values reported by institutional funds, reported a quarterly increase of 0.71% as of 31 March 2020; however, as of that date, US equity REIT share prices declined by 24.20% since December 2019, implying that stock market investors, at least, believe that the real estate underlying these shares had lost value. These conditions raise some important questions for accounting and finance professionals tasked with providing thoughtful and well-supported valuations to their investors and other stakeholders on a current basis, among them:

  • How does the market view the impacts of COVID on real estate values?
  • How should cash flow assumptions be changed to reflect the short- and long-term impact of the virus on individual property as well as on the macroeconomy?
  • How should property-level discount rates and terminal capitalization rates be impacted? Or should they be changed at all?

In an effort to answer these questions and gain other insights into how real estate market participants are thinking about COVID-19 and real estate valuation, EY professionals conducted a survey of over 200 professionals active in the US real estate markets. The survey was conducted in late April/early May and included representatives from private equity funds and public REITS, as well as brokers, asset managers and lenders. Our survey asked participants 18 questions about their expectations regarding value trends, transaction activity, discount and capitalization rate changes, and other questions about the duration and impact of the COVID-19-induced market turmoil.

Property values

Real estate has lower liquidity and less volatility than equity investments. The stock market is an immediate and real-time representation of market sentiment; real estate market values tend to move more slowly due to the presence of long-term leases, 10-year-plus investment horizons and the higher cost and longer time frame required to ultimately sell an asset. This is why market values do not adjust as quickly as REIT prices, which are down as much as 60% from late February to the middle of May. However, this metric does provide a perspective on investor expectations and cannot be ignored when considering property-level valuations.

Transaction activity

We asked our survey participants about their plans for acquisition and disposition activity going forward. Respondents generally expect to curb dispositions of real estate as a result of COVID-19; however, a significantly smaller percentage expect to curtail acquisitions. This suggests a coming disconnect in the market between buyers and sellers that will likely lead to limited transaction activity for the remainder of 2020 in many property sectors.

Valuation assumptions

Regarding discounted cash flow valuation assumptions, our survey participants indicated a reference for adjustments to cash flow items as opposed to discount rate and terminal capitalization rates, in order to model the impact of COVID-19 on property values. A majority of participants indicated that they intend to make top-line revenue adjustments, which could include lowering near-term tenant renewal probability, slowing the pace of speculative leasing and modeling rent concessions and deferrals. Only 26% of respondents indicated that they plan to adjust the discount rate applied to their cash flow forecasts and only 22% plan to increase terminal capitalization rates.

Property sectors

Of course, there is not a generic, one-size-fits-all valuation adjustment for COVID-19. The pandemic has had radically different impacts on the various property sectors and even within sectors, the effect can vary considerably. As such, the following commentary is presented, based on market observations as of March 31, 2020, by asset class with regard to COVID-19 valuation implications.

Property value impact


Within the retail property sector, malls have been the most negatively impacted and expectations are that they will also take the longest to recover. Retail malls have faced an increasingly challenging environment for several years, primarily driven by shifting consumer behavior. Declining foot traffic and rising vacancy put class B/C malls under increased pressure and underwriting scrutiny. COVID-19 has accelerated the changes that were already happening and extended some of the challenges to class A properties as well. Will this change the long-term outlook for malls as well? The COVID-19-related amplification of existing challenges and introduction of new ones is well borne out in the survey results as 90% of retail participants indicated they plan on decreasing their financial forecast in light of the economic uncertainty surrounding COVID-19. More tellingly, 63% noted that there would be a significant decrease. Only 3% responded that they would be increasing their forecast.

Retail discount and terminal cap rates


Hotels across the nation are focusing on understanding customer preferences and expectations (e.g., daily room cleaning, the impact of social distancing on gyms and restaurants) while changing their operational processes to meet or exceed new cleaning standards, social distancing requirements and workplace protocols. The guest experience, which for most defines the hotel identity, is undergoing radical changes. While in part intentional and part an outcome of the current environment, low occupancy levels are for now causing hotels to revisit and adapt their operating models. Reduced guest and event revenue combined with additional cleaning costs have impacted results. The survey results indicate that 73% of lodging participants plan on significantly decreasing their financial forecast. This is the highest among the property types included in the survey.


Industrial real estate fundamentals have been exceptionally strong over the past few years, due to the rise of e-commerce. This trend should continue throughout the COVID-19 crisis, as logistics demand is higher than ever with local and national stay-at-home guidelines. The strong outlook was reflected by the survey participants’ responses regarding their expectations for future property valuations. Eighty-three percent of the participants indicated that they expect values to either hold strong or to increase or significantly increase going forward for industrial properties.


The COVID -19 impact on the office segment will take longer to play out, as much is dependent upon how office users react to the new experience of having large segments of their workforce working remotely. In general, this experience has gone better than expected. Many companies are planning to keep an increased level of remote work as part of their business model going forward.


Generally, rent collections have been higher for multi-family than for other property types; approximately 95% or more for April. However, leasing activity is down. Some public REITs have reported traffic down by 50% or more at the end of March. For now, the focus is on renewing tenants with no rent increases. The number of new units coming online in the remaining months of 2020 will decrease significantly due to limitations that have been placed on construction.

Looking ahead

Based on data published to date and conversations with market participants, we can begin to project some trends for all property types as we move into Q2 valuations (and beyond). While there has been some significant recovery in REIT share prices since the end of March, they are still down significantly in 2020, suggesting that the values of underlying real estate may also be lower. It’s clear the impacts of the pandemic may take several quarters to fully manifest themselves in real estate valuations. Indeed, a majority of our survey participants indicated their expectation that it would take one to three years for values to recover from the impacts.

To read a detailed analysis of every topic click here.


The impacts of COVID-19 on the global and national economy are far-reaching and well documented. In this environment, the valuation of real estate, a highly subjective endeavor in normal times, is made more arduous by the absence of real-time data — a direct impact of the near shutdown of the real estate leasing and transaction markets for most sectors beginning in March. In this article, we have featured some of the most meaningful findings from our survey, with the objective of helping our clients and friends to think about values in the second quarter and beyond.

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By EY Americas

Multidisciplinary professional services organization