How has COVID-19 impacted real property values? The rather "obvious" conclusion might be that value is depressed. No so fast. It depends on several factors, not all of which are obvious.

The primary driver of real property value has always been: location, location, location. Even today, location is a primary aspect of value. However, in situ COVID, here are important considerations:

  1. The type of property frames the appraisal analysis. For example, retail and office space are currently out of favor. Too many people and professionals are home bound; many who are working from home are either not considering a return to the office or wanting a partial return.
  2. The lease and quality of tenants is paramount, especially the longer-term leases. Even if temporary rent concessions are granted, these amounts may be added back at the lease expiration.
  3. Force majeure based on the COVID crisis will likely be rejected as a legal remedy to stop rent payments. However, a bankruptcy case in Illinois was adjudicated in favor of the debtor in possession (plaintiff), an operator of several restaurants.
  4. There are examples whereby certain businesses have thrived and become excellent tenants during the pandemic. The value of these properties has likely increased.

In essence, the ultimate valuation of NOI divided by a capitalization (cap) rate may not apply. Each property must be analyzed separately, and interim NOI or cap rates (or both) should be applied to properly account for the possible impact of the pandemic. At some point, when rents stabilize and we know how retail and office space will fare, normal cap rates may be applied.