Geoffrey Kayton, CPA
6.17.20 | COVID-19 Industry Insights
As we emerge from a three-month period of what some are calling The Great Lockdown, the path to economic recovery is becoming somewhat clearer. Although it’s natural to compare this to recent economic downturns (e.g. The Great Recession and The Dot Com Bubble), it’s become evident that this is like nothing we have experienced previously. While there is quite a bit of debate regarding the longer-term impact of the crisis, it’s clear that the immediate and short-term impact on New York City (NYC) real estate has been and will continue to be significant with certain submarkets more vulnerable than others. It also is clear that while the longer-term impacts are difficult to predict, the crisis will certainly leave a lasting mark on the NYC real estate market. Let’s take a look at the current landscape in the real estate markets and what the experts are saying about recovery.
Lending through a Pandemic
The credit markets are currently experiencing historically low interest rates, a high degree of market dislocation and price uncertainty. These factors complicate loan underwriting, which in turn leads to volume reduction and fewer transactions. This reduction is exacerbated by the fact that traditional lenders are diverting resources to process applications relating to government sponsored programs (i.e. Paycheck Protection Program and Main Street Lending Program) and managing requests for forbearance or other accommodations. In addition, the initial “shock to the system” associated with the crisis ceased the Commercial Mortgage-Backed Securities (CMBS) market, which is slowly coming back to life, and sidelined or completely shut down other lenders. Private lenders, who before the crisis were typically open to deals with underlying issues or risks are among lenders that remain active. However, the deals that are getting done during the pandemic are ones that feature more conservative terms and asset class sensitivity.
State of the Submarkets
In a matter of months, many real estate professionals have gone from discussing things like cap rates, and interest rate swaps to discussing loan and lease modifications and thermal temperature scanners. This shift is being seen across all submarkets of NYC real estate.
Currently, the logistics/industrial submarket is generally viewed as best-in-class; this underlying strength is due to the continuing emergence of e-commerce, which has experienced a relatively low reduction in demand stemming from the pandemic.
Retail and Hospitality
The retail and hospitality submarkets have been most affected by the crisis. For the hospitality market, travel for both business and pleasure had almost come to a complete halt and is just now beginning to come to life. Brick and mortar retail shopping, already reeling from the e-commerce boom, has also been dramatically restricted by state guidelines issued in response to the pandemic.
Office and Multifamily
The situation with respect to the office and multifamily markets is less clear. For the multifamily market, which was already experiencing a slowdown largely due to the Housing Stability and Tenant Protection Act of 2019, delinquent rents and a state mandated moratorium on evictions as a result of the crisis has been challenging. According to landlord trade group Community Housing Improvement Program, approximately 25% of New York City apartment renters skipped rent altogether in May1. While consensus seems to be that the multifamily market will stabilize as the crisis wanes, larger concerns such as the threat of a significant exodus from the city will remain.
With respect to office, the immediate impacts of the crisis primarily relate to strains on cash flow associated with tenants who were unable to pay their rent (primarily retail tenants), as well as other office tenants who requested rent breaks or deferrals. Aside from concerns about market values, cash flows and occupancy rates, owners and operators are being forced to make decisions concerning the safety of their space and retention of current tenants. Industry professionals are discussing surface coatings, UV lights, touchless entries and appliances, and space/barriers between workers. In the short term, new lease agreements will likely see most tenants in a stronger negotiating position given the environment and the relative high supply of office inventory which existed prior to the crisis. However, the question on everyone’s mind regarding the office market is whether or not the pandemic and rapid migration to working-from-home will cause an outright reduction in demand going forward. This remains to be seen.
Much of the discussion concerning economic recovery revolves on the letter or shape the economic curve will resemble. A “V-Shaped,” “U-Shaped” and “Nike Swoosh Shaped” recovery have all been discussed by experts. A survey of U.S. executives indicated that two-thirds are predicting the American economy will recover from the recession within one year2. Chetan Ahya, Chief Economist with Morgan Stanley, predicts that May was the bottom for the global economy3. In terms of the recovery of real estate submarkets, Spencer Levy of CBRE indicated “The way we look at it is in a one-two-three approach: a year one recovery in multifamily and industrial, year two in office and year three in retail and hotels4.”
In an attempt to maintain economic stability, the U.S. government enacted a record-breaking stimulus package. The government response includes forgivable loans for small businesses, payroll tax credits and deferrals, cash payments to certain individuals, and unemployment assistance. Additional rounds of stimulus relief are expected from Congress in the coming months.
As for New York City, industry experts generally remain positive regarding recovery with most mentioning the uniqueness and resiliency of the city. Duston Stolly, Co-Head of Capital Markets at Newmark Knight Frank recently stated that “the uniqueness of New York is its people, its cultural life, the diversity of the economy, and the energy that pulses through its streets. None of that’s changed. It’s only been temporarily suspended. And the sooner we reopen, the sooner we can begin the recovery5.”
For additional information on matters relating to the COVID-19 pandemic, please review Berdon’s COVID-19 Information Center and if you have any questions regarding this article or any real estate related matter, contact Geoffrey Kayton at 212.331.7525 | firstname.lastname@example.org or reach out to your Berdon Advisor.
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4 Commercial Observer Finance Weekly May 8, 2020