In early 2020 China started identifying a virus that was seeing rapid transmission on a person-to-person basis. By mid-February, Western Europe was seeing high levels of exposure particularly in Italy, Spain, and France. By mid-March, the Virus was being viewed as a Global Pandemic and in the US, government agencies and officials at the federal, state, and local levels were starting to mandate closings of businesses and recommending “social distancing” of people throughout the country. We were seeing a rapid increase in identified cases of infections, hospitalizations, and death rates.
The financial markets went into a tailspin, by late March stock and bond markets lost almost 30% of its value from previous record highs. Travel, meetings, and conventions were canceled, retail stores and operations were closed, offices were closed, and workers were working at home starting to use Zoom as a primary method of interacting. Schools were closed, going to virtual classrooms and parents were becoming teachers, along with trying to maintain some semblance of business services. Within the initial few months of the shutdown Congress, the administration and the Treasury pumped nearly $4 Trillion into the economy, implemented two rounds of Payroll Protection (PPP) and put in place restrictions on residential evictions for federally backed loans for homes and apartments. Commercial tenants unable to pay rent were negotiating with landlords some type of rent relief or deferrals. Banks worked with borrowers on deferrals or forbearance on their loans for some period of time. Despite these efforts we saw a number of national retailers file for bankruptcy, (some being weak before the pandemic), unemployment rates go from mid-3’s to 15%-20%, long lines at food banks, major travel related services down 75% and a major 2nd quarter drop in GDP. For real estate, offices were unoccupied, with workers working at home: stores and restaurants closed and trying to deal with take out or drive by pick-up; apartments stayed relatively occupied but with some tenants needed rent relief or deferral; hotels were running at 10%-20% occupancy but industrial space was booming and fulfillment centers being created. By May/June, some parts of the economy, in some regions, were picking up activity by socially distanced services being offered for retail stores and food services. Then we saw some regions seeing an uptick in virus exposures causing states to roll back openings and then major debate in whether schools would open up “in-person” or virtually. As we move past Labor Day, some schools, restaurants, and retail are reopening but certain states and communities are continuing draconian lockdowns and more businesses are figuring out how to survive the “new normal” or just go out of business.
As we move into the late months of 2020 and look forward to 2021, how will Real Estate be affected? While landlords worked with tenants and borrowers worked with lenders, at some point there will need to be a reckoning. Evictions will again be allowed, workouts and forbearance will become limited and owners or real estate, either by chose or circumstances, will have to decide if they want to continue to operate or own their real estate. If a property is to be sold, how will it be valued? With reduced income, reduced occupancy, and questions about whether tenants will remain, or new tenants brought in as replacements, traditional forms of valuation may no longer be viable. If a hotel, office, or retail property is running low occupancy is it viable to continue under its current use, or should an “Adaptive Re-use” plan be considered?
Some feel this economic decline is similar to what was experienced as a result of the “Great Compression” of 2007-2010, I feel it more similar to the RTC adjustments to real estate values starting 1986 and continuing into the early 1990’s. During the RTC days it was exceedingly difficult to determine the value of real estate under traditional methods and it was better to let the “Market” decide “today’s” real current market valuation in a competitive bidding environment. Real Estate Auctions during that time became a much more prominent method for disposition of real estate assets. In today’s market, auctions will be a more efficient method for the disposition of real estate. In an auction environment the Seller can control timing, method of offering, Purchase Contract and expose the property to “Non-traditional” buyers that can pursue adaptive Re-use or repositioning the property reflective of these rapidly changing times, where 2019 values are no longer viable.
On a recent Zoom webinar, I heard the statement “I don’t want distressed real estate, I want to work with distressed Sellers”. While mortgage rates are historically low, some lenders are putting more obstacles and restrictions in place. Some opportunity buyers and funds have not felt that Sellers are being realistic about the “New” realities in the differential between Ask/Bid prices. Pre-pandemic cashflows, income streams and tenant occupancies are not going to be considered in buying dynamics. Buyers are looking for opportunities will look at; current “Real” NOI, projected multi-year carrying costs, redevelopment, and repositioning costs and what will be necessary to get the property financially stabilized over a two-three-year time frame. A competitively bid auction will help both the Seller and the Buyer find today’s “Real Market Value” in a 90-120-day timeframe.
