SECTOR NEWS: How CRE Will Fare in the Coronavirus Pandemic

In February the US economy added 273,000 jobs in February—a number that surpassed the 175,000 jobs economists surveyed by Dow Jones had expected. Ordinarily the report would have been met with satisfaction from the business community, a sign that the long-standing economic expansion was continuing. But these are no ordinary days. Economic activity in February provides little insight into how the economy will progress in the near-term amid the uncertainty of the coronavirus. The stock market met the news with indifference, continuing its rout.

Instead, talk is growing that chances for a recession in the near-term are increasing. Oxford Economics, for example, is now predicting a 35% chance of a recession occurring in the US this year, up from an estimate of 25% it made in early January.

Another indication came from Pacific Investment Management Co (PIMCO), which told clients the coronavirus outbreak is likely to cause a technical recession, or two consecutive quarters of negative growth, in the US and the euro zone during the first half of 2020.

How the commercial real estate industry will fare in a coronavirus-led downturn remains to be seen. "It really depends on how bad the coronavirus gets," CoStar consultant Joey Biasi says. "If it is relatively short-lived it won't have much of an impact. But if it drags down the economy we could see some knock-on effects."

Some sectors are more vulnerable than others, Biasi continues, with hotels particularly in the cross-hairs. Pebblebrook Hotel Trust, to name one example, announced that it has withdrawn its outlook for the first quarter and the year due to the large number of recent corporate group cancellations and corporate travel policy restrictions related to concerns about the coronavirus, which have led to material declines in net bookings year over year.

"We have seen a considerable rise in corporate group- and convention-related cancellations due to concerns surrounding COVID-19, and therefore, we are unlikely to achieve our first quarter and full-year 2020 outlook," said CEO Jon E. Bortz at the time of the announcement. "These cancellations, which have dramatically escalated in just the last 10 days, are largely for business previously on the books for March, April and May of 2020."

Retail will also likely feel an impact if people start to stay away from malls.

Much will also depend on what corrective measures the US federal and local governments will take. China's massive quarantine is credited with slowing the spread of the novel virus and Italy has put the entire country into lockdown in order to slow the spread.

But such steps—even if they are moderate measures—come with an economic price. Unemployment, for example, could rise as businesses and consumers practice social distancing to stay safe. "Once unemployment starts to notch higher, that's when recession becomes a real threat," Moody's Analytics chief economist Mark Zandi told reporters.

"Analysis of previous epidemics suggests that reduced mobility within the population has a greater economic impact than the illness itself," Avison Young noted in a recent report. "On balance, it seems likely that extending the length of the outbreak to reduce its severity will have at least some impact on investment transaction volumes for 2020," it said.

Leasing activity too will likely to see a decline in transaction volumes compared with pre-crisis expectations. Transactions currently under consideration could well be delayed rather than cancelled, Avison Young said, and some deals will inevitably be withdrawn. "Fewer new transactions will be initiated, and some expansion plans will be put on hold." —Erika Morphy

Capital Markets: Coronavirus 'Brutal' as Lenders Hit Brakes on Financing

Much like other everyday activities, real estate transactions are coming to a halt because lenders are holding back over the coronavirus pandemic.

"The last 72 hours has been brutal on its effects on transactions," attorney Daniel Weede said during the first week of the market turmoil. "It's just a standstill. The fundamentals are still sound. Sellers still want to sell property. Developers still want to buy property. All of those are there but without the liquidity, without being able to get the debt and equity and have assurance."

The Carlton Fields shareholder in Atlanta and two other attorneys reported seven transactions among them at a standstill during this tumultuous period.

The intended buyers of three hotels in North Florida, Texas and Georgia have postponed closing after financing dried, and a hotel development project in Miami also has been postponed, Weede said.

Attorney Joe Hernandez in Coral Gables said a landlord told him about a retailer who signed a lease but got cold feet about opening north of downtown Miami.

Hernandez, who leads the real estate practice at Weiss Serota Helfman Cole & Bierman, said he advised the two to assess the situation over the next weeks before postponing the lease.

Attorney Roland Sanchez-Medina Jr. had two clients cancel their purchases during due diligence. The deals covered an $8 million Miami-Dade County condominium unit and a $5 million warehouse near Miami International Airport.

"I can't really fault them," said Sanchez-Medina, a partner at Sanchez-Medina, Gonzalez, Quesada, Lage, Gomez & Machado in Coral Gables. "Ultimately, if you are spending a significant amount of money and you have any doubts, I always tell clients, 'The last thing you want to do is go against your instincts. If your instincts are telling you that this is an issue, the last thing you want to be doing is discount that.' "

The situation mirrors the 2007-2008 financial crisis when uncertainty ruled in the global economy, prompting lenders to quickly pause financial deals.

The Great Recession also could be making banks and alternative lenders more cautious, prompting them to adopt a wait-and-see approach.

" It all happened so quickly. In 2008 that's exactly what happened. There were loan commitments. People used to think a commitment meant a commitment. A lender was committed to making a loan. They found out, and these are seasoned professionals, that a commitment is not a commitment," Weede said. "You do not close until you close. In essence, this is the same way. It's not that banks are bad institutions. They have to have the money to lend the money."

"This world is becoming smaller and smaller every day so people are impacted by the global economy. You are seeing the impacts on airlines, cruise lines. Spirit Airlines will be fine. Carnival Cruise Line will be fine, and the airlines will be fine," Sanchez-Medina said. "But if you have a business that is an ancillary business to what they do, that's going to have real impact."

Hernandez suggested all deals will follow the wait-and-see approach his landlord-client encountered.

"That would be the recommended approach for any transaction right now, although it's not always possible with hard closing dates. When possible, a short-term pause allows parties in transactions to avoid making decisions with long-term consequences based on the events of the last few days," Hernandez said.

That's what Weede and his clients are doing as they wait to see what pandemic-afflicted markets will look like.

"I am confident ultimately we will be able to work the deals out," he said. —Lidia Dinkova

Retail Focus: The Real Reason So Many Stores Are Closing

There is a dynamic impacting all of retail that needs to be addressed, namely, the myth of a retail apocalypse.

We have heard for years now about the death of brick-and-mortar retail at the hands—or is that the thumbs—of e-commerce. Indeed, according to Business Insider, some 1700 stores are expected to shutter this year. A short list would include Pier 1, which expects to close 450 units; the Gap, which will click off the lights in 230 stores; ditto Chico's, at 200 of its properties; and Forever 21, which will close 178 stores. This data was also brought out in a recent webinar conducted by the Institute of Real Estate Management on Trends for 2020.

Certainly, the consumer press salivates over such headlines, in the grand old if-it-bleeds-it-leads tradition, and simplistically pointing to our home shopping as the driver. Happily, the business press takes a more nuanced view. There are underlying reasons for the ongoing trend of store closures, and yes, while e-commerce has a hand in it, the reasonable response to this apparently dire news would be to ask the follow-up question: Why?

If people are shopping differently today, and they are, it is not to the exclusion of brick-and-mortar venues, but rather to those brands that have not been able to think in an omnichannel strategy of bricks-and-clicks working together. It is to the exclusion of formats that are simply old and tired, and never forget the devastating impact of simple, old school poor management.

If online shopping was killing traditional retail, why then are the likes of the Home Depots and Macy's—that's right, Macy's—typically counted among the nation's top 10 internet retailers? Because they have jumped that hurdle of how to marry the two shopping trends. (Macy's is shuttering stores that are non-performing, putting its capital into more robust omnichannel strategies.)

Smart owners are getting into the game as well, and they're ramping up the immersive experience that shopping can be, extending the definition of shopping by folding in restaurants and other amenities, from Instagram walls to trampoline parks. The American mall is not dead. It is being redefined, as is all of retail, net lease tenants included. Times of redefinition are also times of great upheaval, and the announcements of store closures are but the tip of that transitional iceberg.

And so, the next time you read a headline blaring the closure of this or that iconic brand, take a breath. Step back. And ask: "Why?" —Jonathan Hipp

MARKET TRENDS: Ivy League Schools Amass Large Land Portfolios

Ivy League universities are traditionally thought of as centers of world-class education. But new findings from Reonomy say they, along with other schools around the country, are also becoming real estate power players due to their impressive collection of assets.

The Reonomy report, which breaks down the real estate investments and commercial properties owned by Ivy League Universities, reveals Yale University is New Haven's largest landlord and that Harvard University is the wealthiest university in the world, with an endowment of $40.9 billion.

"Universities have always had an interest in investing in real estate, and we have seen that as endowments have grown, so have real estate investments off-campus," says Nikki Russell, Marketing Manager for Reonomy.

The other Ivy League schools are also amassing impressive real estate collections. Princeton University owns approximately 160 nearby residences, which can be purchased by eligible faculty and staff.

Princeton provides a Tenancy-In-Common Program that allows eligible faculty and staff to enter into a co-ownership agreement with the school to purchase residences within a nine-mile radius of Nassau Hall or within the city of Trenton. It isn't alone in trying to tackle affordability.

"As for concerns with housing affordability, there have been some interesting efforts made by Stanford and Princeton to offer subsidized or provide housing for employees, though it's unclear what the driving force for those programs are, and if they are effective," Russell says.

Housing isn't the only focus of these universities. Cornell University owns 486 properties, which are the most of any Ivy League school. Columbia University has spent $6.3 billion on its new Manhattanville campus expansion.

Universities want to create a diverse portfolio of investments, and real estate is an essential part of that, according to Russell.

"We see most of these universities reducing their endowment's dependence on domestic marketable securities, and reallocating to real estate and private equity," she says. Russell says the uptick in real estate allocations has been most noticeable at Yale in the past 20 years. The University of Pennsylvania has been investing in surrounding communities since the '90s. The school is now Philadelphia's largest private employer. "But the increasing investments made with commercial partners [likely led by UPenn's example] is something that has expanded to other schools," Russell says. "Brown's investment in South Street Landing is an example of this. And it surely isn't limited to just the Ivy League Universities—all universities with large endowments likely have a stake in real estate assets as part of their portfolio."

University holdings are expanding beyond housing and offices. For instance, Dartmouth College maintains a portion of the Appalachian Trail. But that's not all.

"In terms of asset holdings outside of the university's mission, one of the most interesting findings was around holdings outside of the core areas of interest for these Universities, such as acres of agricultural and vacant land in Texas and Montana, and the sheer size of Cornell's land investments," Russell says. —Les Shaver

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