By Dennis Kaiser

NAIOP SoCal hosted a webcast this week titled “Navigating in Unchartered Waters: Leading Experts Share Insights on How they are Handling the Impact of COVID-19.” The NAIOP discussion with five commercial real estate leaders was conducted via Zoom and touched on a host of issues and ideas for navigating through the volatile times currently being experienced.

Sheppard Mullin’s Pam Westhoff, who serves as NAIOP SoCal chapter President, moderated the workshop that included CBRE’s Val Achtemeier, RiverRock Real Estate Group’s John Combs, NKF’s Greg May and Lincoln Property Co.’s Parke Miller.

CBRE’s Achtemeier kicked off the discussion with an overview of the capital markets landscape. She noted the debt and equity markets index rates are down dramatically, yet the opposite is being experienced on credit spreads, which have “risen dramatically.” She also noted fixed rate lenders now have floors. Achtemeier pointed out debt and sales activity had been “very robust” across the capital markets the last three years. That’s all changed she says, as muted liquidity has brought about the tightest market she’s seen in the last five to six years, though deals are still getting done, Achtemeier reports.

A couple things have changed, notes Achtemeier. First, the index spreads changed and more importantly, she says is the changes occurring within the CRE debt stack, as debt funds have been hit hard the past few weeks.

Banks have taken their foot off the pedal to some degree, mainly as a result of a shift in focus to deploying the stimulus package funding. She’s also seeing some pause now in the CMBS space due to some volatility. Achtemeier says, two to three weeks ago, life companies were acting differently and had a harder time pricing deals. They were pausing or quoting floors that were too high for long plays. That’s changing a bit the last week or so. In mid-March, they may have locked up an industrial core loan at a sub 3% and today it has widened out to 3.75 to 4%. Though there are more players in the market, and life companies may have good bridge programs to consider.

Generally speaking, Achtemeier says, they are closing life company deals that were “baked before,” COVID-19 took over, and those are typically not getting re-traded. That is a similar situation on the banking side, though there are some re-trades happening in the debt fund world, where deals are not closing at the last minute or are facing major price changes due to liquidity issues. She also points out in those cases alternative plans have been sourced. The expectation is that there will be flex pricing with CMBS, even for good sponsorship, says Achtemeier, as well as volatility in non-balance sheet side.

Lincoln Property Co.’s Miller pointed out they are still exploring acquisitions in the current market. Though he notes it is difficult to “price deals at this very moment in time” mainly because it is hard to understand where financing will come from due to the COVID-19 uncertainties. Additionally, buyers are faced with issues getting their arms around rent and absorption numbers, and that’s proving to be tough to “effectively determine a fair price,” he says.

The property types faring the best include industrial, which is favored especially in SoCal, as well as multifamily. There’s also demand for data centers and self-storage facilities. There’s been greater scrutiny on retail, hotel and office, as new production pauses in those sectors, notes Achtemeier. Yet, lenders that went in search of yield in secondary markets, now are returning to primary markets where the fundamentals make sense.

NKF’s May says tenants are still doing deals, though they are happening at a slower pace. Transactions have tended to be short term leases too, with more free rent and concessions. He is seeing landlords trying to adapt, to see who truly needs rent relief and who doesn’t. He noted many tenants did pay April rent bills, but he wonders what will happen in May and June. That means those at the property level must communicate to help alleviate any surprises.

He says the strongest property types have been data centers, as companies seek to bolster their security measures, especially since there’s been more remote work. The life sciences sector is strong and industrial, which was strong before, continues to be in demand, especially since essential businesses are housed there.

Going forward, there is expected to be a more permanent shift to remote work environments, maybe by as much as 20%, notes May. This COVID-19 era has helped test that model, and to figure out ways to be productive. May says, the emergence of remote workers may require an examination of how companies look at their office space needs in the future, from a total demand as well as to accommodate different densification needs.

RiverRock’s Combs noted one of the biggest challenges faced at properties is the fact that rents are due this week. He notes landlords are scrambling to figure out who paid. He advises managers, brokers and asset advisors to remain in constant communication to address each situation as rent relief requests come in. So far, he notes they’re seeing about 5% of tenant receivables not paid with roughly 10% of those coming in with rent relief requests. The challenge for landlords and owners will be to determine which are legitimate.

On the retail front, some of the hardest hit tenants are food and beverage operators, points out Combs. He notes that will challenge centers that have shifted to cater to consumers dining out habits and entertainment preferences. His advice to landlords is to figure out how best to work with restaurant and bar tenants as they work through their issues, since there really isn’t a large number of occupiers lining up behind them to back fill space. An interesting strategy he pointed out that the Irvine Company now is deploying at its properties to have “specialized workout plans” for each tenant.

He notes for properties with tenants that want to get out of leases it is a challenging time. Further, since no one knows how long the current situation will last, that will make it tough for anyone to make long-term decisions. Combs thinks now is the time to focus on the return of people to workplaces, hotels, restaurants or retail centers to figure out what that looks like in future. He says they are turning an eye to what makes people want to come back, and getting them comfortable with coming back as part of the “re-entry process.”

Lincoln Property Co.’s Miller agrees that the world and CRE has dramatically changed, due to the disruption caused. But, he says many people simply aren’t giving themselves enough credit for their resourcefulness and resilience to get bridge the divide from before COVID-19 to today. “How we work, live and eat, has undergone a wild transformation, and we need to take credit for being adaptable and flexible to manage the chaos of this disruption,” Miller says.

From a business perspective, Miller notes companies are still going through the process of figuring things out, so it will take a bit longer to get through it. Though he’s confident we’ll come out the other side and figure out what needs to be done to “get back to square.” He says they are still conducting their core business, some areas with less frequency and other with more frequency. He noted they have done LOIs and executed leases, though at a slower pace than before. There are still core and shell construction jobs underway at buildings, though work may be moving slower to accommodate distancing and health protection guidelines.

In fact, Miller said about 30 minutes prior to the NAIOP SoCal webcast they completed a large office refinancing that started 90 days ago. He said it got done because the lender and LPC remained focused. He also points out they are still conducting due diligence on portfolio acquisitions now, even as they consider how to be responsive to needs of a health pandemic. Miller says it is important to look ahead and try to imagine what re-entry looks like down the road for occupiers, and how landlords can make sure buildings are ready to welcome them back.

NKF’s May pointed out that no one truly knows what tomorrow will look like. He hopes that we’re at the “end of the beginning,” though admits there is still more to learn as we move towards a time when people can come back to work. The commercial real estate leader says brokers now are a bit less transaction-focused and have emerged as advisors and consultants to clients. He’s talking to his team more than ever to find out what’s going on and to learn what they are hearing in the marketplace, as well as what their clients’ plans may be. He believes brokers will “earn a seat at the table” by aggregating that information and providing it to clients as a current and transparent form of communication.

For comments, questions or concerns, please contact Dennis Kaiser