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CRE Opportunities and Pitfalls in a K-Shaped COVID Recovery

K- Recovery
“Silver capital letter K, isolated on white background.”

Solid investments are out there. Finding them depends on assessing the changing demand.

In the rush to predict how an economy crippled by COVID will look, many experts have tossed around the shapes of letters to illustrate how an economic recovery will look. There is the gradual but steady upturn of a U, a V’s immediacy, and the yo-yo effect of a W. 

The newest letter to be added to the alphabet soup is K. While it assumes that everyone starts at the same point, it depicts what has taken shape since the virus reached the United States—different trajectories traveling away from each other. 

K represents the differences between Wall Street and Main Street, people who can work from home and many of those who can’t, and individuals with the liquid assets to survive or thrive in a recession and those without them. 

CRE and the upward K

The K-model can also be applied to commercial real estate, where each sector faces its own unique challenges and opportunities. Some will move upward while others will face a greater struggle during recovery—if they recover at all. 

For example, here are a few sectors seen as winners:

  • Perhaps the strongest sector is warehouses. These facilities were already robust before the pandemic, as the growth of e-commerce required more localized hubs for speedy delivery. But lockdowns plus the public’s reluctance to return to enclosed spaces even after re-opening have resulted in a far greater demand for efficient online delivery services.
  • Data centers have also thrived since the start of the pandemic. In early spring, millions of workers and students learned to work remotely for the first time. That trend remained strong over the summer as surges continued to erupt across the country. With re-opening parameters and continued preventative measures, as well as an erratic positivity rate, many companies and schools across the country will remain remote for months to come. And a portion of this shift is permanent.
  • During the lockdown, grocery stores filled the void of closed restaurants—and continue to do so, as millions of people find it more cost-effective to prepare meals at home or are reluctant to return to dining out.
  • People still need medical care. Despite some practices having to close until they could get preventative protocols in place, and others feeling the pinch as demand for elective procedures dropped, medical office buildings remain open for business. 

CRE and the downward spokes of the K

Sadly, COVID has had a more substantial negative impact on some sectors. These areas look to have a tougher time bouncing back to pre-pandemic levels:

  • Many pundits argue that the pandemic highlighted fundamental weaknesses in our society, from underlying health conditions to wage inequality to a lack of access to quality Wi-Fi. In CRE, perhaps there’s no better example than the venerable mall. For years, these mega shopping centers have battled the growth of e-commerce and the loss of major retail anchors through endless re-inventions, including housing fitness centers, entertainment venues, spas and salons, and restaurants. But all of these tenants have not only suffered under COVID but will have a more difficult time attracting consumers to return to indoor experiences.
  • While the Great Recession introduced the staycation into the American vernacular, COVID made the phrase feel like a life sentence—especially for any facility associated with the travel industry. The cancellation of large-scale events, conferences, and pleasure travel—as well as physical distance mandates—have had a tremendously negative impact on hotels. While the sector is expected to bounce back, the timeline for that rebound depends upon a vaccine and Americans returning to work. Even so, many companies will hesitate to spend on business travel and large conferences like they have in the past.
  • Restaurants and bars are arguably the primary faces of our derailed economy. Deeply impacted by the lockdown and subsequent virus-prevention measures, many owners and operators have fought to survive by increasing take-out services and turning parking lots and streets into outdoor dining spaces. This may continue to work in warmer areas of the country, but cold weather and predictions of a second surge will complicate recovery.
  • Not too long ago, co-work facilities were seen as a hot new wave in CRE. But the pandemic has changed the equation. Until a viable vaccine is created and distributed, the industry will have to convince workers that shared desks and offices are a safe alternative to working from home—and likely make significant property improvements to make these spaces safer. 

Where the two trajectories begin

When looking at the K recovery model, there’s that point where the two trajectories begin their outward journeys. It’s here that some sectors may linger for the foreseeable future before picking a definitive course.

  • The office sector was especially hard hit due to the virus as workers were sent home and doors locked. And many large-footprint office spaces are on a downward trajectory. But the American office should not be discounted, according to economists. Instead, the sector will need time to re-find its place in a world where remote work and physical distance are the norm. This evolution will likely include fewer open floor plans, flexible spaces and work shifts, and smaller footprints.
  • Multifamily property owners quickly felt the COVID pinch in the first months of the pandemic. The lockdown and loss of employment among many residents resulted in missed rents. Although government efforts provided some relief, months of lingering unemployment continued the late- or missed-rent cycles. Some of these losses may ease with the economy’s slow re-opening and the addition of foreclosed homeowners in need of housing.
  • As colleges and universities shut down to opt for online courses and students packed up to quarantine at home during the spring semester, many student housing operators found themselves having to re-negotiate rent agreements. With the fall semester, there was an expectation that student housing would bounce back via campus re-openings. As of this writing, the sector remains a rollercoaster ride as many college students fail to observe social distancing recommendations and requirements. The result has been localized spikes and quarantines, as well as some universities quickly returning to online study.

These examples, of course, are far from exhaustive. The crucial lesson of a K-shaped recovery and its impact on CRE is that different properties will have significantly different trajectories. Investors must closely evaluate an investment’s potential in the new environment.

Finding your place in a K-recovery

More than likely, the economy will recover in phases. And there may be setbacks (depending on a future surge) and lags (especially in sectors that cater to underprivileged socio-economic communities). At the same time, other factors—consumer confidence, virus positivity rate, cost-control efforts from the corporate sector, the arrival of a vaccine, and a Presidential election—are influencing not only the speed and scope of the recovery but also the exact shape of the K. 

As an investor, the reality is that any rebound, regardless of the letter, will take time. Therefore, it’s essential to diligently assess investments and property improvements and choose those that make sense. A regional mall project or an office skyscraper that requires significant capital investment, for example, likely wouldn’t be wise choices.  

For assistance in determining how to proceed with an investment or to find the right property for your needs, please call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Are Big Cities a COVID Casualty?

Looking into the rising sun up a deserted Brooklyn, DUMBO, backstreet at dawn.

Or has the pandemic merely spurred the need for a new beginning?

Consider it the essay that was heard ‘round the world. James Altucher, a former hedge-fund manager, author, and comedy club owner, penned his opinion that New York City was dead because of the fallout from the COVID-19 pandemic. In the piece, he laments the loss of business opportunities, cultural venues, and restaurants. 

Naturally, that propelled a series of opposing opinions—most notably, from Jerry Seinfeld. Many of the rebuttals predicted a rosier future for NYC with a nod toward residents’ grit and determination. But these pieces seem to overlook some real-world economic problems. And many of these have been bubbling under the surface for decades.

Before we engrave the tombstone or send out re-birth announcements for New York, it may be wise to answer a basic question: If it can happen there, can it happen anywhere?

What COVID did to NYC

In many ways, COVID-19 decimated NYC. With one of the densest and largest urban populations in the world, the virus spread quickly and efficiently—and it was deadly. There were 19,000+ confirmed deaths, 4,400+ probable deaths, and thousands more in the boroughs and counties surrounding Manhattan. 

Shutdown measures were swift and severe, and many—such as a darkened Broadway—have lingered despite lower case counts. Simultaneously, residents, reminiscent of those battling plagues of the past, fled the city to their Hamptons homes or their parent’s suburban tract houses. The rest of the nation followed NYC’s lead—and the longer the shutdown continued, the louder the non-virus-related questions became.

A look at some of the issues

Some of what NYC is experiencing may have been inevitable; COVID just exacerbated some long-simmering crises and accelerated their impacts:

  • As residents fled NY to work remotely from their childhood bedrooms, or simply lost their jobs due to the shutdown, millions realized how cost-burdened they were when it came to rent. And if people can now work anywhere, why should businesses and workers continue to pay it?
  • Similarly, many NYC commercial spaces were also struggling long before COVID. According to a pre-pandemic January 2020 article, the combination of overhead costs—labor, benefits, rising taxes, rent increases, and city fees—meant hundreds of NYC restaurants and bars were already perched on the ledge of financial collapse, while other commercial properties just joined a growing list of vacancies.
  • In the years leading up to the pandemic, there was also a shift in population. For example, downstate New York led the state’s population loss for two consecutive years. Similar stats can be found in Los Angeles and Chicago, while smaller cities, such as Denver, Washington, DC, and Miami, all experienced slower growth. At the same time, millennials—the generation that pioneered remote work—have spent years flocking to smaller cities and suburbs in search of affordability, opportunity, and space for their young families. 

Living in an experiment

The problem with the current state of city affairs is there’s no rulebook. Because of the pandemic, people are behaving differently—and much of their new behavior does not reflect how they wish to live their lives. As a result, it’s difficult to predict how NYC and other cities can respond. 

Until there’s a vaccine, it’s impossible to estimate a timeline of when business will get back to normal—or if it ever will. For example, the virus and remote working have forced office tenants to re-examine just how much space they actually need.

The closest example we have to an experiment in progress is Detroit. Perhaps no other city in the country exemplifies urban failure better than the Motor City. Once the crown jewel of American industry, Detroit has for years suffered under the weight of rampant unemployment, poverty, and enormous debt. In the five years after filing for bankruptcy, millennials moved in, investors took notice, and the downtown area boomed, earning the city a new nickname: “Comeback Capital of Urban America.”

Things, though, didn’t go according to plan. With development came higher rents for residential and office spaces, higher construction costs, and gentrification—all of which steered millennials away from the city while driving impoverished residents into greater despair. Then, COVID arrived. Just as in NYC, the virus capitalized on Detroit’s weaknesses. 

The view from South Florida

Perhaps it has to do with the sunshine and palm trees, but South Florida cities and COVID are an anomaly. Despite being a COVID hotspot for the state since March, new construction and leases in South Florida have continued to move forward. In addition, the region has also seen its share of New Yorkers and other northern urban snow birders relocating to Florida’s warmer climate for the duration of their home states’ lockdowns, as well as millennials flocking to the suburbs. 

This doesn’t mean, though, the region is not without its share of problems. Like other large metropolitan areas, South Florida has its own affordable housing crisis. Additionally, in 2017, Miami had the second-lowest median household income in the United States, as well as the second-highest percentage of people living in poverty.  

Although these numbers improved slightly in 2018, COVID-related unemployment has undoubtedly made the numbers skyrocket. Complicating this is the Florida economy’s heavy reliance on tourism, which has caused some experts to predict the job market may suffer into late 2021 and beyond.  

South Florida businesses and real estate may have been less impacted by the pandemic than NYC, but they share many fundamental challenges. A new way of working and evolving COVID measures and restrictions are changing priorities. Commercial properties such as office high-rises with a large footprint, for example, will have to adapt to the new normal—and some investments may not make it. 

Are cities dead? 

While COVID has clearly placed extreme burdens on large metropolitan areas, is it time to ring their death knell? Probably not. 

There is a good reason to believe that cities will recover, although it remains unclear just how that recovery will actually look. Most certainly, things will be different. Technology will undoubtedly play a role, as will smaller office footprints.

A recovery for New York (and other major metropolises) will take leadership, vision, and work. At the same time, there is a need to address the underlying economic issues that made so many of our cities and people vulnerable, including wages, population density during a pandemic, and affordability. 

For assistance determining how to proceed with an investment or to find the right investment property for your needs, please call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

What is Going to Happen with Rent Payments?

CRE rental payments - Retail space available sign in a commercial real estate building
Commercial retail space available sign.

Commercial real estate landlords are understandably nervous about the future 

The economic impacts of COVID-19 won’t be fully measured for quite some time, but one thing is clear:  many commercial real estate owners aren’t receiving rental payments from tenants. 

Even as communities reopen, numerous restaurants, personal-service providers, and retailers don’t do enough business to pay their bills. Restaurants operating at 25% of capacity, for example, are seeing revenues well below normal, even though they are now technically open for business. In March, industry experts predicted that 2020 would see a loss of up to 75% of independent restaurants in the United States, representing five to seven million lost jobs and $225 billion in revenue. 

Small businesses are unable to pay their bills across the country, leaving commercial real estate landlords to ask, “What about the rent?” 

In the spring, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the federal government imposed a moratorium on foreclosures and evictions, keeping both homeowners and small businesses in their properties during the initial shutdown. But that moratorium expired in July. 

In Florida, Governor Ron DeSantis extended the statewide moratorium to September 1st. But that extension only applied to residential tenants who have been “adversely affected by the COVID-19 emergency”—the order did not affect CRE rental payments.

Then, on August 8th, 2020, President Donald Trump signed four executive orders for coronavirus relief, including one that was positioned as preventing evictions. That executive order is widely seen as having no legal teeth, however. It merely recommends that federal agencies consider whether a moratorium on residential evictions is needed—it doesn’t actually prevent evictions of any kind.

And while Florida currently has no statewide order preventing commercial real estate evictions, both Miami-Dade and Broward Counties have enacted some moratoriums

Broward’s “order prohibits the issuance of any writs of possession until normal court operations resume,” and “the sheriff’s office has suspended serving eviction notices during the COVID-19 pandemic.” Miami-Dade has “suspended [police department] enforcement of any eviction orders until the COVID-19 emergency expires.”

Broward County’s order is in place “until further notice,” and Miami-Dade County’s directive is in effect until “expiration of the emergency period”—which was extended on March 18th and remains ongoing.

What does all this mean for CRE rental payments and contracts? 

All rental agreements are contracts, of course. And when contracts lose meaning, much of the foundation of our economy and society unravels. 

Landlords are caught in the middle—between compassion for their tenants and the need to make their own mortgage, insurance, and property tax payments. While almost everyone in the CRE equation understands and empathizes with the unique economic burden COVID-19 has placed on businesses, it’s vital that contracts become enforceable again—and that evictions happen when they are absolutely necessary.

In the meantime, is it fair if landlords lose their investments? And what about tenants who may be experiencing temporary economic hardship? 

The current situation calls for flexibility and a diligent eye on the longer-term implications of each tenant-landlord relationship. Landlords and tenants should keep open communication lines and review leases to see if any necessary accommodations can be reached as the economy reopens. 

Some high-profile tenants are pushing back on terms

Starbucks, for example, has reached out to all of its commercial landlords to renegotiate rental payments. 

“Effective June 1st and for at least a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures,” said the letter distributed [in May] signed by Starbucks Chief Operating Officer Roz Brewer. 

Chipotle Mexican Grill and Shake Shack have followed suit. Dunkin’ Donuts, Applebee’s, and Yum Brands, which includes Pizza Hut, KFC, and Taco Bell, are undertaking similar efforts, including tying terms to lease extensions.

It’s not out of the question to expect this trend to continue as various businesses—large and small—operate under government capacity restrictions and other limitations. 

Should landlords forgive or renegotiate CRE rental payments? 

Many landlords hesitate to drop the amount for rental payments to accommodate tenants because “accounting rules still allow them to book income if rent is deferred, as long as it isn’t reduced. Temporary rent forgiveness or discounts would also reduce their property valuations, which could hurt an owner’s ability to get a loan.”

That said, landlords may be able to work out temporary deferments or other measures to keep some income flowing, tenants in business, and property values stable. 

Again, landlords and tenants should keep the lines of communication open. If you are a landlord, tell your tenants not just to go dark and stop paying: “Keep us in the loop so we can help, and let us know what’s going on with your income stream.” Having those numbers will make it easier to approach your commercial lenders with renegotiations or forbearance requests. 

Also, keep in mind: While landlords might work something out with bank lenders and insurance companies, commercial-backed mortgage securities (CMBS) are another matter. CMBS are a type of financing with no single “entity”—investors pull together into a security instrument, so there is no one to speak with about renegotiating terms.

Thus, if you have CMBS financing, tenants stop paying, and you can’t pay, there’s little you can do. The moment you are late with a payment, the financing goes into special servicing, and the property is in immediate jeopardy. 

This creates a unique problem for CRE investors with this type of financing—and getting overdue rent payments or being able to evict non-paying tenants becomes even more critical. 

Keeping an eye on the CRE situation

The pandemic continues to contribute to disrupted business and high unemployment, which snowballs into even lower business revenues, among other consequences. All of these factors are affecting the ability of many commercial real estate tenants to pay their rent. The federal government is still working on a follow-up to the CARES Act that may provide some relief, but government assistance can only do so much. And it’s essential for CRE investors to closely monitor the national and local economic outlooks and stay adaptable.

In these most uncertain of times, a trusted advisor and property manager can be a valuable resource. At Morris Southeast Group, we’re closely watching how all of this plays out, and we’ll be sure to keep our readers and clients informed as the situation changes. 

If you have questions about CRE investing strategies, property leasing needs, or property management services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

CRE and Surviving The COVID Recession

CRE and Surviving The COVID Recession

Taking steps to evaluate the current situation and weather the storm

When it comes to hurricane season, Floridians know the drill: stock up on canned goods and water, fire up the generator for a test run, keep cash on hand, and ensure the storm shutters are in working order. It’s usually the same idea when it comes to weathering a bad economic forecast. For the most part, investors and tenants know the steps to take to somewhat manage an economic downturn. 

But hurricanes, as we all know, can be unpredictable—and the COVID recession is proving to be just as difficult to anticipate. The timing of a vaccine, lingering surges of infections, the prospect of a second wave, and the financial fallout of lockdowns and relief packages have resulted in the great unknown. And that, in turn, is creating uncertainty that surpasses that of the Great Recession.

A “normal” recession vs. a “new-normal” recession

Markets always go through cyclical changes, and these swings are usually separated into four distinct phases, with unique CRE impacts: 

  • Recession: In a typical recession, sellers have accepted the economic situation (at about the four-month mark), and it becomes a buyer’s market. Real estate prices start to come down. A few months later, foreclosures peak and prices bottom out, creating an excellent time to buy. Property values on both residential and commercial properties are severely impacted.
  • Recovery: This phase is marked by two consecutive months of decreasing unemployment numbers, declining rental rates, and a leveling off of vacancies. This phase’s beginning is pretty much rock bottom, still making it an excellent time to buy.
  • Expansion: Low vacancies, higher rents and values, and booming construction switch the market to a seller’s one. Good deals are still out there but require a bit more effort to find.
  • Hyper-Supply: The construction boom from above results in an abundance of properties combined with low rents and high prices—until these factors return to alignment. This is usually not the best time to buy. 

COVID-19, though, is making it difficult to predict any of these “normal” phases. 

The current factors are mixed. Technically speaking, for example, we have seen more than two consecutive months of employment gains. As of this writing, there have been four straight months of decreasing unemployment, from April’s astounding high of 14.7 million to July’s 10.2 million. But the combination of uncertainties, as well as a full recovery that may be dependent upon a vaccine, has made these “definitive” phases not so well-defined. 

Preparing for the long haul

The typical first step in grappling with a recession is determining what phase the economy happens to be in. But with so much uncertainty, that’s no easy task. 

With the onset of the school year and the potential for new outbreaks—as well as additional phases of reopening and closing—there’s a genuine possibility the market will behave more like a ping pong ball, bouncing back and forth between economic stages. 

But there are still ways to analyze the situation and take action:

1. Analysts have speculated about a V-shaped economic recovery (good) or a W-shaped recovery (less than ideal), with the shapes of the letters indicating the course of the economy. But it seems more likely that we’re in for a “K-shaped” recovery, where various sectors rise or fall based on fundamental changes to demand brought on by the pandemic. Thus, evaluate all CRE decisions based on your resources and the unique demand for a potential investment type.

2. Consider property improvements that make sense, if you can afford them. Some actions may not only help maintain the property’s value during a recession but also prepare for new tenant needs in a post-COVID world. Again, evaluate this through the framework of a K-shaped recovery; capital improvements in a smaller office space that make it safer for tenants are likely more valuable than doing anything to a large retail property.

3. Evaluate when and how to keep money on the sidelines, and when you should use it. This piece of advice is tricky, since trying to “time the bottom” of the CRE market is difficult to impossible. This maxim is especially true since specific sectors are trending upward, and we really don’t know what post-election economic sentiment and consumer confidence will look like. Also, record-low interest rates may provide a solid floor for property values. But this level may be broken if the broader economy, including the stock market, drops significantly due to longer-term factors. 

Thus, investors must again use the framework of whether an individual investment makes sense in a post-COVID world. Investing in a high-rise structure in an urban center is likely a bad idea, as social distancing requirements and a trend toward remote work make the viability of these properties questionable. Similarly, regional malls are probably big losers. In contrast, a modern office with a smaller footprint and great amenities may still make sense, and any well-located facility that can be used as an e-commerce distribution center is likely to do very well.

Evaluate each opportunity based on how it may play in the new economy—and deploy your capital wisely.

A final thought on getting through the recession and prospering on the other side of it

Perhaps no other bit of advice matters more than a reminder to be patient if you can afford to do so. The uncertainty of the pandemic demands a mid- to long-term view, along with the ability to adapt. 

Harbor enough liquidity to weather new challenges to investments that you maintain and scrutinize all potential opportunities in light of the pandemic’s significant social and economic changes. The advice that’s vital in any economy applies here, as well: base every decision on a diligent examination of potential ROI.

For assistance in determining how to proceed with an investment or to find the right property for your needs, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

CRE and the True Cost Of Capital During COVID-19

CRE and Capital During COVID-19
Portrait fragment of Benjamin Franklin close-up from one hundred dollars bill

The wisdom and ability to tap “cheap” capital for commercial real estate investments

There’s very little doubt the 2020 global economy isn’t pretty. Ravaged by COVID-19 and government actions to curtail the public health crisis, there is record unemployment, record stimulus-relief packages, and record-low interest rates.

Many view these “easy money” rates as sound economic policy to head-off—or at least better manage—the recession. That said, economists and lenders are looking at the long-term implications for a post-pandemic economy. And in practice, the rates set by lenders are often significantly higher than the target rate set by the federal reserve.

The LIBOR transition has not happened yet, and could be slowed

In addition to direction from the Federal Reserve, banks also look to the London Interbank Offered Rate (LIBOR). Based on five currencies (the US dollar, the euro, the British pound, the Japanese yen, and the Swiss franc), LIBOR determines the average interest rate at which major global banks borrow and was, at one time, considered the world’s most influential interest number. In the United States, it was the most popular index for adjustable-rate mortgages.

Then came the scandal. More than a decade ago, regulators discovered that traders were manipulating rates set by some of the largest banks in Great Britain. For 10 years, there’s been a phase-out process as countries worldwide seek alternative risk-free reference rates.

COVID-19, though, may be delaying this transition, which was expected to be completed in 2021. In a world of pandemic-related uncertainty, many officials in different markets are sticking with the devil they know rather than look toward something new. 

HousingWire states that a Moody’s Investors Service report shows that “Regulators such as the Federal Reserve have increased the nation’s reliance on LIBOR by using it as an index for emergency lending.”

Lessons learned from 2008

Not looking to repeat the harsh lessons of 2008, banks wandered away from collateralized debt obligations (CDOs)—since such loans made to homebuyers before the subprime housing collapse led to the Great Recession. Instead, lenders shifted toward collateralized loan obligations (CLOs). This has created a new vulnerability:

After the housing crisis, subprime CDOs naturally fell out of favor. Demand shifted to a similar—and similarly risky—instrument, one that even has a similar name: the CLO, or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled companies. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan. There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.

Loans in a CLO are bundled together, and if they default, the risky bottom layer loses more. Once the lower levels are wiped out, the damage trickles upward to the safest loans. Right now, the CLO market is bigger than the CDO market at its peak. 

To offset these losses—pending and actual—banks have kept more capital on hand to protect against a downturn. But no one could have predicted the across-the-board economic wreckage caused by COVID-19. 

On their own, CLOs will not eat up capital reserves. But when they’re combined with losses in other asset areas and dried-up revenue sources, financial institutions could be looking at a Lehman Brothers-sized meltdown. 

This, of course, had caused them to look for ways to hedge this risk. This effort includes charging interest rates well above the fed target rate and carefully scrutinizing borrowers’ creditworthiness.

The inflation question

On the tips of tongues and in the backs of minds is the idea of post-pandemic inflation. In a sense, it could be the second gut-punch in the fight with COVID-19. In fact, the ingredients are already in the pot—trillions of federal dollars in the economy via loans and relief packages that translate into trillions of dollars of national debt, people out of work, defaulted loans, businesses either shuttered or skimming by, and disruptions in supply chains. 

The ingredient that’s missing is a vaccine. That will be a great and glorious day, of course. But once it exists, people could entirely leave lockdowns and resume their consumer lives, which will result in increased demand—but this could involve shortages and stagnant wages that can’t keep up with rising prices. The result is inflation.

It will then fall to the Fed—followed by the banks and other lenders—to determine a course of action to slow it down. Generally speaking, higher interest rates tend to lower inflation—and this, in turn, can slow down available capital for investing.

Easy money isn’t always so easy

When it comes to raising capital, most investors turn toward banks or private lenders. In general, banks are typically more affordable but have more requirements to be approved. Private lenders, although more flexible, are often more expensive because they get funds from investors looking for decent returns and/or banks that lend them money. As a result, the private lender’s cost is passed on to the borrower.

The uncertainties surrounding COVID-19, though, are forcing banks and private lenders to apply more stringent risk assessments to loans, and pricing accordingly. For example, while the Fed establishes a specific rate, LIBOR helps the bank determine points above that interest rate, making it more expensive to borrow money.

At the same time, loan standards have tightened to make the process even more rigorous. This includes more significant documentation, larger down payments, and higher credit scores.  

What’s an investor to do?

Investing in anything has a bit of uncertainty in the best of times. But the current environment has loads of it. To better prepare, investors need to ask themselves some serious questions before raising capital:

  • How long do you plan on holding onto the asset? Short-term and long-term holdings can have different risk factors, and these have to be weighed against the best predictions for how long COVID-19 will last, when a vaccine will become readily and widely available, and the time it takes for the economy to rebound in a vaccine and a non-vaccine environment.
  • Will the investment be a good hedge against inflation? Generally speaking, real estate values and rents increase with inflation. This, however, is a COVID world, and that creates its own set of questions: Will people be able to afford higher rents in a post-pandemic economy? Will small business tenants be able to secure loans? What will be the demand for different property types?
  • Are my office/retail buildings going to be worth anything? Because of social distancing, lockdowns, and remote working, the office and retail sectors were especially walloped by the pandemic. Will that change with a vaccine? Will you be able to adapt your structure to meet the new conditions of the new normal? Are you prepared to work with new tenants to help them survive, for your own survival?
  • If you’re unable to secure funding through a bank, can you afford financing through a private lending firm? Remember, these options are more expensive, and detailed due diligence and projections for the investment are still required.
  • Are you able to weather the uncertainty? Because of uncertainty, values are expected to encounter volatility as the market adjusts and corrects. There will be significant opportunities, but the time horizons for anything are unclear.

A heightened awareness

Many of the issues raised here are nothing new. In many ways, they’re the same concerns and questions to have during any investment time-frame. COVID, though, demands a heightened awareness because of the degree of uncertainty. 

While the cheap cost of capital via low interest rates will drive some investments, an investor must also consider both mid- and long-term scenarios based on intended hold periods and the nature and future of the property.

For assistance in determining how to proceed with an investment or to find the right property for your needs, please call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

The Looming Legal Challenges of COVID-19

The Looming Legal Challenges of COVID-19
Justice lawyer corona concept

A pandemic for the litigious age

COVID-19 has come to mean many things to many people, from a global public health crisis to a logistical nightmare to a political hot potato. It has also presented a new set of legal challenges.

With lockdowns, re-openings, and a hodgepodge of rules, business owners are worried about lawsuits related to exposure, workplace health and safety, termination, and discrimination. As of this writing, more than 3,900 COVID-19-related complaints have been filed in federal and state courts.

At the heart of these issues is fear of uncertainty coupled with the lack of a national liability shield. This measure would protect entities from lawsuits if they took appropriate measures to safeguard customers and employees.

While national politicians on both sides of the aisle have presented arguments for and against such protection, their lack of agreement has resulted in some states enacting their own liability reform legislation. These measures have provided some assistance for businesses located in a specific state, but they have also created a patchwork of confusion for organizations with interests in multiple states.

A look at liability at the federal level

From the outset of the COVID-19 stimulus efforts, groups from all corners of the economic spectrum—the US Chamber of Commerce, colleges and universities, national manufacturers, independent business owners, and a host of others—embarked on lobbying efforts to get Congress to back liability reform.

The idea is at the center of the GOP’s most recent proposal, introduced in July. Senate Majority Leader Mitch McConnell has indicated that the liability protection included in the Safe To Work Act is non-negotiable. Democratic critics, on the other hand, see the effort as an infringement on workers’ rights, with wording that makes it nearly impossible for a suit to get to court. 

Consequently, the trick for Congress is to find a middle ground. And when, where, and if that will happen, no one knows.

States take their own steps

Without a liability policy coming out of Washington, many businesses and organizations began asking patrons and employees to sign waivers. States then rose to the challenge, and by the end of July 2020, 12 of them had enacted versions of liability reform to fend off frivolous legal attacks.

While each of the separate initiatives share similarities, they are nevertheless different—and this, in turn, can leave certain individuals and businesses vulnerable.

  • To create all-encompassing COVID-related protections, many states have intentionally used broad language. The more general the language, though, the greater the room for error in its interpretation. Phrases like “reasonably attempt to comply with public health guidance” can easily lead to questions on what represents compliance and which applicable health guidelines are to be followed. Remember, we are more than six months into this, and we still can’t all agree on masks.
  • Many of the state measures are not meant to act as a blanket liability shield. Businesses are still required to adhere to standards that forbid grossly negligent and reckless behavior.
  • Legislation in Georgia contains a Rebuttable Presumption. Through warning signs posted at various points, patrons are essentially waiving civil liability claims against the business.

To avoid confusion, it’s in the best interest of businesses to perform their due diligence. Does their local jurisdiction have a liability shield? Does it protect those outside of the healthcare field? What type of infection is covered? Does it contain a rebuttable presumption, and what are the requirements?

The battle for insurance

In addition to liability reform efforts, another legal battle is also taking shape—this one between businesses and insurance companies that have been rejecting business interruption claims.

Typically, business interruption insurance covers three main areas: business income coverage, contingent business interruption coverage, and order of civil authority coverage.

These claims are only covered under specific circumstances, and at the heart of the matter is whether COVID-19 constitutes “physical damage.” Plus, as of 2003, most insurance companies added exclusion clauses specifically aimed at bacterial and viral incidents.

It’s also important to understand the practical reasons for insurance companies avoiding COVID-19 payouts: lockdowns created such widespread business interruption that successful claims would bankrupt the insurance industry.

As discouraging as that sounds, some business owners aren’t backing down and are taking their claims to court. According to the National Restaurant Association, lawsuits filed in both state and federal courts are “too numerous to count.” In Philadelphia and Chicago, more than 100 plaintiffs filed a federal petition to have all COVID-19 business interruption cases heard by a single judge.

At the same time, groups are lobbying Congress and states for business interruption insurance coverage relief packages. The essence of both efforts is two-fold: to include pandemics as part of business interruption and to eliminate coverage confusion.

Searching for a safe harbor

Anything related to COVID-19 is fluid—from the course of the disease to preventative measures to legal ramifications and legislation. In this environment, it’s essential to keep a close eye on developments, thoroughly understand your insurance documents and the ratings of your provider, and work with your professional organizations and their lobbying groups to advocate for political solutions.

Safe Harbor provisions have existed in various areas of law for years, including taxation, environmental regulations, and the Affordable Care Act. The time has come for a similar provision to be added to liability law at the national level. Until then, I’m advising clients to think carefully about re-opening, closely follow local and CDC guidelines, and consider having patrons and employees voluntarily sign waivers as a means of legal protection.

If you need guidance on re-opening or any commercial real estate issues, please call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Potential CRE Property Improvements To Adapt To COVID-19

Potential CRE Property Improvements To Adapt To COVID-19
Social Distancing in Modern Office With Glass Cubicle.

How the pandemic is changing—and could transform—commercial real estate spaces

In addition to everything else we can blame on COVID-19, the pandemic has altered what’s important in commercial real estate. Not long ago, landscaping, security, and lighting were among the key elements to increase property values, and often ranked high on the list of tenant wishes.

But with the pandemic and re-openings, the most significant concern is the health and safety of anyone entering a property. Much of that reflects growing health concerns and awareness of how the virus spreads. But there’s also a very practical interest in limiting liability and the potential for lawsuits.

To that end, preventative measures come in numerous shapes, sizes, and price points—and many of them are contingent on property usage.

Immediate steps for reopening

At the top of any reopening checklist is evaluating the floor plan of the property, followed by making adjustments based on the best practices outlined by leading health authorities, such as the CDC. Generally, this means keeping at least 6’ of space between people, limiting group interactions, and mitigating air-droplet spread.

Steps that some properties are taking include:

  • Using furniture to create distance. Desks, for example, should be at least 6’ apart. If space is tight, some furniture may be removed or roped off. Bookshelves and other office furniture may be moved into positions that help maintain distance, while temporary walls and partitions can be brought out of storage and put to better use. In some cases, plexiglass partitions are attached to furniture to create boundaries.
  • Since communal spaces are discouraged, converting that space into storage for any pieces removed from the main work area is an option. So is using it as a workspace for a portion of socially-distanced employees.
  • Implementing foot-traffic patterns that make sense for the property. For example, signage can remind people to move in one direction when walking about the office, up and down the aisles of a retail space, or when entering or exiting a conference room.
  • Steps to maintain distance can be as simple as signage, arrows, and colored tape on the floor, or as elaborate as “The 6-Feet Office,” which uses bold colors and patterned carpeting to delineate social distances for offices and traffic.
  • Enacting policies that stress flexibility, choice, and wellness. These can include elevator etiquette reminders, the creation of cohorts or teams to limit the number of people actually in the office on any given day, hand-sanitizing stations, and a clean-desk policy so surfaces can be disinfected easily. Enhanced cleaning protocols are considered critical.
  • One possible way to minimize COVID’s spread in interior settings is to open windows and allow fresh air to circulate. For many buildings, however, that’s not an option—either windows don’t open, or the weather is too hot and humid. But some companies are moving specific workspaces, such as conference rooms, outside.

Looking to hospitals for CRE inspiration

By reopening, many commercial properties and their occupants have joined others on the frontlines of the COVID-19 battle. It only makes sense, then, to look to the veterans of the war: hospitals. These facilities have valuable lessons for preventing the spread of diseases to others.

  • For decades, we’ve been warned about the dangers of ultraviolet (UV) light, specifically UVA and UVB, which are responsible for sunburns and skin cancers. But there’s also UVC, which, because of its short wavelength, cannot penetrate Earth’s atmosphere. There is a subset of wavelengths (far-UVC) that has been shown to kill “99.9% of seasonal coronaviruses present in airborne droplets.” Handheld, mounted, and mobile UVC devices have already appeared in hospitals, nursing homes, and food establishments.
  • Because weather and design keep many windows sealed, there is growing interest in how recirculating air from HVAC systems helps spread COVID-19. One potential solution is the addition of UV lights into HVAC ductwork to sterilize indoor air and improve ventilation. Also, proper air filtration (depending on the size and scope of the unit) and maintenance contribute to better indoor air quality.
  • One of the challenges hospitals have faced in the COVID battle is having to increase Airborne Infection Isolation Rooms, also known as negative pressure rooms. Air from the positive pressure space is forced under the door opening into a room with negative pressure, where dangerous microbes are then “captured.” From there, microbes are released into the outdoors, where they disperse and eventually die. The fundamental difficulty for many commercial buildings, however, is in maintaining an even, positive pressure due to HVAC issues and building usage.
  • COVID may call for leveraging Internet of Things (IoT) technology to make energy systems in the property smarter. With changes in the work dynamic, such as fewer in-house staff or staggered hours, owners may see savings by embracing an adaptive energy system. The building’s energy system knows when and how to operate based on the changed occupancy and hours of operation.

Reopening in SoFlo

While debates continue about states reopening too quickly, businesses are opening as cases are skyrocketing, and people want to get back to work. For owners, property managers, and tenants, the challenge is ensuring that enough has been done to protect the health and safety of occupants.

The complicating factor in COVID-based property improvements is that people are using commercial spaces differently—and the demand for some buildings is waning. And many of the most useful property upgrades—such as enhanced HVAC systems—are expensive.

Money may seem cheap due to very low interest rates. But many lenders are factoring risk into rates, and some institutions only lend to applicants with exceptional credit and significant resources.

In addition, the benefits of any property improvement must be balanced against the financial risk to owners. Installing a new HVAC system for a 10-story office building, for example, is a major capital investment. This expense may be unrealistic in light of diminished demand for a space and increased demand for shorter leases, which reduces the odds of recouping the investment. Then, there is the risk of lawsuits from customers and employees who may become infected on the premises.

We will cover many of these issues in future blogs. For now, sound advice for tenants and owners is to stay current on best practices for reopening as safely as possible. And everyone must carefully evaluate their financial and health-risk scenarios—and make decisions that make sense for their people and businesses.

At Morris Southeast Group, we stay on top of commercial real estate trends and will continue to update our clients and readers. As always, we are here for all of your CRE needs, including helping you evaluate potential steps to create or lease a safer property.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

5 Reasons Commercial Real Estate Occupiers/Tenants Benefit from Using a Tenant Rep Advisor

5 Reasons Commercial Real Estate Occupiers/Tenants Benefit from Using a Tenant Rep Advisor  morrissegroup.com
Lease Agreement

Negotiating the new normal during the pandemic’s fallout and beyond

Over the past few months, we’ve written a lot about the impact COVID-19 has had on commercial real estate. In a short span, the landscape drastically changed—from commercial real estate (CRE) prospects to rent strategies to strategies for business survival.

Another area that has been affected is the role of tenant advisors. For many tenants, the reasons they chose an advisor in a pre-pandemic world have taken on an urgent and even essential character. And in some ways, tenant reps are uniquely positioned to help businesses manage a new normal characterized by new space requirements, issues, and opportunities.

1. Negotiation

When it comes to tenant broker/advisors, many people believe their sole purpose is to broker lease negotiations. In fact, there are many other benefits. But there is no denying that knowledge of comparable amenities and monthly rents, as well as keeping a wary eye out for hidden fees, lease pitfalls, concessions, and confusing language all come together to assist the tenant in achieving the best terms.

2. Access

It’s common for a tenant to search for available properties on public websites. But these sources are only the tip of the CRE iceberg. A professional and well-seasoned tenant advisor, armed with local market experience and internal tools of the trade, will have greater access to properties, many of which will be better suited to your needs and price range.

3. Networks

Tenant reps, particularly those who are well-established, can recommend a team of experts to assist the tenant in turning a newly leased space into something that meets his or her needs. The importance of this service has grown as businesses must adapt structures to social-distancing requirements. Resources can include architects, designers, space-planning experts, air-quality companies and maintenance contractors.

4. Representation

In most cases, tenant rep fees—just like fees for the listing broker—are covered in the price of the leased space. In other words, landlords already expect that a tenant rep will be part of the process. In transactions without the involvement of a tenant advisor, the landlord’s leasing agent will just be paid more. When a tenant contracts with a qualified advisor, it’s an indication that they are serious about negotiating and will do so in good faith. And the advisor always maintains a constant focus on the tenant’s interests.

5.  COVID-19

Ultimately, all of these benefits are tied to the current state of affairs, as COVID-19 has significantly changed the CRE equation. Just a few months ago, it was a landlord’s market. But quarantines have forced landlords and tenants, very often with the assistance of tenant reps, to renegotiate leases to keep both sides of the table afloat.

Now that the economy is re-opening and utilization requirements have changed, tenants have more leverage as landlords compete to fill vacancies with reliable income streams.

Using a tenant advisor representative in South Florida

Tenants in South Florida are finding themselves in a unique position as they work to start new endeavors or save existing ones while navigating leases, re-opening phases, and the spike in new COVID-19 cases. The tenant advisory service at Morris Southeast Group can alleviate the stress of searching for the ideal space and negotiating lease terms, while helping businesses adapt to new requirements.

To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

COVID-19’s Impact on Businesses in Broward County

COVID-19’s Impact on Businesses in Broward County morrissegroup.com
Open sign in a small business shop after Covid-19 pandemic

A look at the business environment during the initial response to the pandemic

When Gov. Ron DeSantis issued statewide social distancing measures on April 1, it was done to head off predictions that Florida could follow New York’s lead in hospitalizations and deaths from COVID-19.

As we watched the Florida economy grind to a halt—particularly in the state’s southern counties, it seemed that we had somewhat dodged a viral bullet. This positive outcome has recently been overshadowed by quickly rising infections, with the state setting multiple records for new cases in late June and July.

While the initial lockdowns seemed to have worked initially and were less strict than certain states, businesses were severely impacted. With doors locked shut, workers furloughed, and some places filing for bankruptcy, the Greater Fort Lauderdale Alliance and Broward County issued a survey to gauge the pandemic’s economic impact. The research also strives to better understand the needs of businesses and identify opportunities to provide support.

A snapshot of the participants

Between April 20 (three weeks into the quarantine) and May 29 (nearly two weeks after Phase 1 of re-opening), the two groups began outreach to Broward businesses. Data collection resulted in 1,000 responses from businesses in all of Broward’s 61 counties, as well as 18 responses from Palm Beach, Miami-Dade, St. Lucie, Columbia, and Cook counties.

Of the responding businesses:

  • 22% are in the professional services sector
  • 8% are in the accommodation and food sector
  • 8% are in the healthcare sector
  • 8% are in the retail sector

In addition, the distribution of survey responses mirrored the county’s jobs distribution:

  • 17% in professional services
  • 12% in retail
  • 12% in education and health services
  • 9% in accommodation and food services

Key finding: operations and remote work

If there is any good news in the survey results, more than three-quarters of respondents (81%) said that their companies were open for business. Of these, 47% reported they were operating at regular hours and 34% at reduced hours.

Although 19% were not in operation during the studied period, it appears that remote work played a vital role in allowing many businesses to remain open. Sixty-six percent of respondents reported that either all (43%) or some (23%) of their employees were working remotely. Thirty-four percent indicated that they did not adopt this work option.

Key finding: Revenue, layoffs, and furloughs

This data gets to the economic heart of the matter—the bottom line for business and employees. Ninety percent of the respondents reported that the pandemic caused revenue losses, with 52% indicating their revenue had decreased by more than 75%. An additional 38% reported a decrease between 25% and 50%. Only 10% of businesses reported no revenue decrease (8%) or an increase (2%).

A closer look at job sectors provides an even clearer picture of the economic toll COVID-19 has taken on Broward businesses.

  • Not surprisingly, tourism took the greatest hit, reporting an average revenue loss of 87%. It was followed by life sciences (80%) and arts and culture (77%).
  • The financial sector reported the highest (31%) proportion of respondents with no revenue loss.
  • Wholesale trade (6%), manufacturing (5%), and healthcare (5%) were among the handful of job sectors that reported increased revenue.
  • 62% of respondents indicated that they did not lay off or furlough employees.

Key finding: Seeking assistance

The vast majority of companies (82%) applied for assistance through various federal and state programs. Although 241 respondents (18%) indicated they did not submit a single application for relief, the remaining companies (82%) applied for one or more stimulus sources.

  • The most well-known of the relief packages is the CARES Act PPP, the record-breaking stimulus package passed by Congress. According to the survey, 73% of the 545 applications for the program were successful.
  • In contrast, the Economic Injury Disaster Loan Program, administered through the Small Business Administration, had only a 39% successful application rate for 333 applications.
  • At the state level, the Small Business Emergency Bridge Loan Program had the lowest success rate—just 17% of 99 applications.

Where do we go from here?

In many ways, that’s the most difficult question to answer. While the survey presents a better picture of COVID-19’s initial impact on Broward’s economy, the situation remains unclear as caseloads rise. Nevertheless, the data does provide insight into what worked for businesses and what didn’t during the lockdown, and potential areas for improvement and government support.

This is a conversation that needs to happen immediately. As of this writing, Florida has sequential spikes in new cases, ongoing debates about mask-wearing mandates, and businesses closed and fined for failing to adhere to COVID-19 preventative guidelines.

Morris Southeast Group continues to monitor the economic impact of the pandemic. And we will update our clients, colleagues, and readers as events unfold.

If you have any questions about CRE investing or services, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Millennials on the Move to the Suburbs?

The new downtown is often in suburbia

Leave it to the Millennials. Regardless of the misplaced blame that generation receives, there’s no denying that they have single-handedly changed the real estate landscape as much as Boomers have.

Consider the urban downtown landscape, a space that was transformed by a live/work/play lifestyle that embraces walkability and experiences. With Millennial needs and developer visions coming together, city block after city block filled with residential towers, galleries, cafes, and coffeehouses.

There comes a time, though, when every generation grows up, and priorities change. For a generation of Millennials on the cusp of middle age, those changes have meant children, skyrocketing rents, and the realization that cities may not provide all that’s necessary—things like detached homes, private yards, and good schools.

In other words, suburbia.

Not your parents’ suburbia

In many ways, Millennial desires closely mimic those of the Boomers, the generation that grew up in the first suburbs. This new generation, though, isn’t exactly interested in their parents’ or grandparents’ suburban experience, first made popular in places like Levittown, NY. Instead, they’re looking for suburbia with an urban twist.

For developers, this trend is significant. Studies indicate that Millennials will form two million households per year for the next ten years. In Jacksonville, Orlando, and Tampa, for example, Millennials are the number-one new-home purchasers. Similarly, Miami, Miami Beach, and Fort Lauderdale are in the top 10 Florida communities with the largest increase in Millennials since 2010.

The suburban resurgence & CRE

Just after World War II, when William Levitt devised his master plan for Levittown—“the prototypical American suburb”—one of its hallmarks was a town green. Located within easy walking distance to various neighborhoods, the spaces were reminiscent of the city neighborhoods from which new residents had come. They included greenery, a playground, and a strip mall with essential services, such as a laundromat and delicatessen. At some point, though, suburbs sprawled, and convenience felt farther away.

With the Millennial push for suburbia, developers are taking a look at the master plan for both new and established communities. Developers are examining how to create town centers that embrace the same live/work/play lifestyle that made city downtowns the place to be.

Desired tenants may include craft breweries, rooftop restaurants, cafes, retail, service businesses that present employment opportunities, shared workspaces, event venues, galleries, and pop-up opportunities to test market ideas. Another priority is businesses that provide Millennials ways to include their young families. A shared trait is that all of these areas should be easy to get to, and just as easy to get home from.

The COVID-19 connection

As with most things these days, there’s a pandemic factor. While COVID-19 isn’t responsible for the new interest in suburbia, it has certainly played a role in revving it up.

As metropolitan areas around the country were quarantined, wealthy residents fled the cities for their summer homes in the suburbs to escape contagion and claustrophobia. Many younger generations rented homes or moved back into the suburban houses in which they were raised. In the suburbs, it was simply easier to be socially distant and still get outside, even if that outside was a private yard.

Offices are also looking at the suburban landscape in response to COVID-19. CDC re-opening guidelines suggest employees commute alone and that businesses restrict the use of elevators—two concepts that don’t gel with working in an urban high-rise. For some companies, relocating to properties outside of the city center may make it easier to manage risk.

The new American Dream

It’s important to remember that this isn’t a one-size-fits-all American Dream. The span of Millennial ages runs from 24 to 40 years of age. That’s at least two to three different life stage brackets and an income span that’s just as wide.

While some Millennials may be looking in more affluent suburbs, others are opting for more affordable options. In either case, developers have been presented with an opportunity to look beyond metropolitan centers—and this may be one element of a post-COVID world.

To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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