This virtual symposium, organized by the MIT Price Dynamics Platform, included four excellent papers and an enlightening panel on COVID-19’s impact on commercial property pricing. The presenters and panelists showed that COVID-19 is having a sharp negative impact on commercial real estate transactions and liquidity. As expected, retail and office properties have suffered much more than industrial and residential properties. Tenants are still paying their rents, but anecdotally there is trouble. Distress in leases for a full year are not yet observable. Retail bankruptcies are the only signal at the moment.

The first paper, by Chongyu Wang, Tingyu Zhou and David Ling, examines the transmission of an asset market shock to the capital markets during the COVID-19 pandemic. They find that daily abnormal returns react negatively to COVID-19 growth, there is substantial variation across property types.

The second paper, by Ernesto Aldana, Jacob Sagi and Andrea Chegut, shows that the term structure of lease contracts documents the forward price dynamics of space. This work could help us understand expectations of prices of space in the immediate, short- and long-term. The results depict a complex outcome where space is slow to reset expectations in the face of shocks. So immediate lease rates will likely be slow to absorb a shock like Covid-19, but a 5-year forward price will be much more responsive. Overall, these tools can be helpful for forecasting price expectations for very opaque space markets like commercial office properties.

The third paper, by Marc Francke and Alex van de Minne, provides a new Bayesian repeat sales mixed-frequency approach that allows us the estimate portfolio values of privately held commercial real estate on a daily frequency. This allows them to provide a daily price estimate of private real estate during the Covid-19 pandemic in real-time.

The fourth paper, by Dorinth van Dijk, David Geltner and Anne Thompson, quantifies liquidity impacts measured by the Demand-Supply Gap in terms of asset pricing implications for US private commercial real estate markets of the COVID-19 crisis. Since the beginning of the recent crisis, liquidity has dropped much quicker than in the beginning of the Global Financial Crisis (GFC). In fact, some drops are almost as large as during the entire GFC. So far (using data up to June 2020), predicted average price drops based on the historical lead-lag relationship between liquidity and prices range between 15 and 35 percent.

Ultimately the big question is: what is the effect on prices. On this question, however, there is a lot of disagreement, as you can see in the recording of this symposium, which includes a stimulating panel discussion at the end moderated by Greg MacKinnon, Head of Research for PREA, and involving the paper authors as well as Jim Costello from Real Capital Analytics.

Below are links to slides from each of the presenters as well as the symposium recording.

David Ling, Chongyu Wang and Tingyu Zhou

Ernesto Aldana, Andrea Chegut and Jacob S. Sagi

Marc Franke & Alex Van de Minne

Dorinth van Dijk, Anne Kinsella Thompson and David Geltner

James Costello

Greg MacKinnon