Waterford Q&A: Navigating Unprecedented Times
By Dennis Kaiser
Waterford Property Company is an owner-driven diversified real estate investment and development company, with an established track record in land development and entitlements as well as acquisitions and repositioning of commercial and multifamily properties. Its founders, Sean Rawson and John Drachman, have collectively acquired or managed more than $1 billion in projects throughout California and Arizona. The firm currently owns a Southern California portfolio of 1.55 million square feet of office properties and 932 units of multifamily. They are in the process of entitling/developing 1,000 multifamily units in various cities.
Connect Media talked with Waterford’s Drachman (above right) and Rawson (above left) to gain their insight into what owners need to be doing now, amidst the slowdown and what they see for the near future.
Q: What are your thoughts on survival planning as the COVID-19 pandemic unfolds?
A: Survival will take an astute focus on being a strong operator. Real estate is a living and breathing asset. An investor that has bought and operates from a very high level won’t succeed in this dislocation. It will be evident if people bought too much or don’t have the right team in place. And, it will show who is able to roll up their sleeves and work the real estate to do the best for their tenants. Where we thrive is that we are knee-deep in the markets where we invest and are active with local public agencies. Within one to two weeks of the crisis, we put together plans and had re-underwritten every asset. We talk daily with equity partners and are in constant communication with our lenders, team, tenants and brokers. While we can’t meet face-to-face, we are trying to be as engaged as possible, even while working from home. Looking ahead, our focus has changed. We’re not looking at doing new deals, but going into heavy asset management mode with revised business plans for every asset, knowing there will eventually be opportunities to acquire new assets.
Q: What are some ways you suggest working with tenants today?
A: This crisis will impact every facet of the economy. Fifteen percent of our office tenants have inquired about rent relief, and we’re reviewing each request on a case by case basis. A majority of those asking really need it. We’re feeling it most with retail that serviced our office tenants, including gym, cafe, chiropractor, dentist, and day-care uses. They’ve all asked for rent relief because they can’t operate their business, due to stay-at-home orders.
Our multifamily portfolio is not as impacted. Class A well-located properties haven’t experienced a high collections issue. Seven to eight percent of existing tenants didn’t pay rent, but that is not as catastrophic as the B- to C + properties where it’s closer to 15%. While it’s not as bad as we all thought it would be, May will be a different animal. April was so close to the start of the lock down in March, but May will be much more telling in multifamily rent collections.
Q: What do you see ahead for the CRE industry?
A: We are highly-focused on acquiring distressed multifamily residential assets, if those opportunities materialize, and growing our affordable housing business. In the last two years we completed construction on three new affordable Low Income Housing Tax Credit (LIHTC) projects totaling approximately $100 million in total project costs, and plan to break ground this year on two new public-private partnerships that will be affordable housing, a 65-unit community in Irvine and an 80-unit property in San Juan Capistrano. We have experience and a solid track record partnering with cities. Affordable housing is an asset class that is not as sensitive to market cycles, specifically high rent growth. Moving through this crisis, we plan to cultivate and grow our affordable housing business and further our city relationships. Because of this COVID-19 crisis, cities will be dealing with their own financial hardships. We can work with them to figure out what kind of partnership opportunities there are, especially if they have problem projects, and ways we can grow our business and help them as well.
From an office perspective, there were trends already happening that COVID-19 has now put acute pressure on. Companies may realize that some people can be effective working from home which could shrink space. The flip side is that others will discover they don’t like this work from home experiment, and prefer the office. Those employees will need more space when they do return. There will be a greater need for clean air, innovations in air conditioning systems and air circulation and more security presence at buildings. Creative office has already started to give tenants control of their own destiny in their space, whether they owned the building or their own floor. We think tenants will increasingly look at spaces where they have their own entrance and their own restroom and those spaces will be priced at a premium. However, where you have multi-tenant office buildings with public elevator banks and public restrooms, it will be interesting to see how comfortable tenants will be returning to those buildings. As we look at office space, we will all be mindful of that, as well as doing everything we can to make our buildings as safe from a health perspective as possible for our tenants when they start coming back to work.
For comments, questions or concerns, please contact Dennis Kaiser