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Report Expert: Exploring the Impact of COVID-19 on Private Markets Real Estate

This blog post is an excerpt from out latest report Exploring the Impact of COVID-19 on Private Markets Real Estate: Trends in Industrial, Office, Multifamily, and Retail. Read the full report here

Despite persistent COVID-19 case counts in the United States, public equities have experienced a “V” shaped recovery. As of September 30, 2020, the S&P 500 has delivered a 52% total return since the COVID-19 induced low on March 23, 2020 to settle at a 5.57% YTD through the close of the third quarter. This can likely be attributed to significant support from the Federal Reserve coupled with modest improvements in employment numbers as American companies try to cope with the impact of the pandemic.

Real estate indices, however, have been flat in 2020. The NCRIEF NPI Index returned 0.71% in the first quarter, -0.99% in the second quarter, and 0.74% in the third quarter. As of September 30, 2020, the index has returned 0.45% YTD and a 2.01% 1-year return on strong 4Q 2019 performance. Through the third quarter, the weakest segments of the NCEIRF NPI have been hotel and retail with trailing 1-year returns of -22.89% and -16.27% respectively. Industrial real estate continues to be the most resilient segment and was the only property type to post positive returns in each quarter this year.

Exploring the pandemic’s impact on core real estate sectors

The negative impact of the pandemic may take longer to flow through to the valuations of privately held assets, and while it may not be to the same degree as in the public markets, it will undoubtedly have an effect on deal and fund performance in the private markets. Deal flow has already slowed significantly as real estate focused GPs work to assess the impact of the pandemic on the asset class.

These factors are significant uncertainty for the asset class as we move into 2021. Further, the unprecedented increases in unemployment claims and mandatory retail store closings since the start of the pandemic will eventually put a strain on rent collections in the coming quarters.

At eVestment Private Markets we have access to vast amounts of qualitative and quantitative data on private markets, including data from before, during, and after the 2008 global financial crisis. To understand what the recovery to this crisis might look like, we looked back at that data as well as a range of metrics we’re seeing in today’s market to analyze private real estate deals

Industrial Performance

Prior to the pandemic industrial real estate locations benefitted from strong demand brought on by the rise of e-commerce and improved third-party logistics networks. In the 10-year period from 2006 to 2015, industrial deals exhibited a strong recovery from the global financial crisis attracting more capital and rewarding investors with strong performance. Our survey of roughly 900 industrial private real estate deals from 2006-2015 shows an average gross IRR of 17% with a TVPI 1.7x representing more than $11.1 billion invested.

Industrial Outlook

Early reports show that industrial properties are proving to be resilient due to an increase in demand for e-commerce-based deliveries as social distancing orders continue to be the norm. Industry consultants expect that the sector will continue to ride these tailwinds as we continue to deal with the spread of COVID-19. As NEPC noted in a June real estate review, “Over long-term, demand for industrial [is] likely to remain strong as e-commerce growth continues and some industries may move more manufacturing onshore.”

We’ve seen this demand play out in the fundraising data via reported commitments from public plans to in industrial, and e-commerce (data center) focused real estate funds like Exeter Industrial Value Fund V and IPI Partners II.

Read the full report for insights on how the pandemic has impacted public pension plan investors’ commitments to private real estate funds, how core sectors performed in the wake of the global financial crisis, and how those sectors may fare through the current crisis.

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