Pandemic continues to challenge Hotels and Retail

• Hotels and Retail are the most challenged sectors while Office faces uncertainty; Industrial remains the best performer.
• Income remains positive except in the Hotel sector.
• Appraisers have more certainty on the pandemic’s impact on valuations.
• Return dispersion by manager within the ODCE Index is due to the composition of underlying portfolios.

More than $200bn of dry powder

• U.S. core open end funds have investment queues of roughly $5 billion and exit queues of $20 billion.
• More than $200 billion of capital waiting to be deployed in North America
• Majority of dry powder capital in opportunistic, value-add, and debt funds

Fundamentals will continue to be affected

• Vacancy rates for all property types have been or will be affected.
• Net operating income has declined as Retail continues to suffer.
• 4Q20 rent collections showed relatively stable income throughout the quarter in the Industrial, Apartment, and Office sectors. The Retail sector remains challenged, with regional malls affected most heavily.
• Class A/B urban apartments relatively strong, followed by certain types of Industrial and Office
• Supply was in check before the pandemic.
• New construction of preleased industrial and multifamily is occurring.
• Transaction volume dropped off during the quarter, except for multifamily and industrial assets with strong-credit tenants, which are trading at pre-COVID-19 levels.
• Cap rates remained steady during the quarter. The spread between cap rates and 10-year Treasuries is relatively high, leading some market participants to speculate that cap rates will not adjust much. Price discovery is happening and there are limited transactions.
• Callan believes the pandemic may cause a permanent re-pricing of risk across property types. Property types with more reliable cash flows will experience less of a change in cap rates; however, those with less reliable cash flows will see greater adjustments.