When ICSC cancelled its main convention, ICSC RECon, and Next Realty’s annual Las Vegas luncheon was also cancelled, the firm found a way to make the best of a disappointing situation. Along with other co-sponsors, Next Realty hosted a V.I.P. (Vegas-in-Place) Zoom webinar discussion during the regularly scheduled Las Vegas convention.
The 60-minute session was moderated by Eteri Zaslavsky, Managing Director at Next Realty. Program panelists included Andy Hochberg, CEO at Next Realty; Tom Jaros, Partner at Levenfeld & Pearlstein; Dan Rosenberg, SVP at Bellwether Enterprise; and David Benz, Managing Director at FGMK. The diverse roster of panelists – an owner/investor, attorney, lender and tax consultant – covered an equally diverse array of topics. The common theme was a moment-in-time snapshot of the retail sector, along with a view of the broader CRE marketplace.
Andy Hochberg highlighted some of the positives he’s seen, months into the pandemic, and with little sense of when things might return to a sense of “normal.”
“It’s been very positive to see small businesses trying really hard to meet their financial obligations to landlords,” Hochberg says, acknowledging that in the first days and weeks of the pandemic there was tremendous uncertainty. He also noted that banks appear “willing to play ball” depending on the individual situation.
These positives are in stark contrast to the disappointment in how some big businesses may have seized the opportunity to take advantage of the current situation to reduce their own operating costs. It’s viewed as disappointing because landlords aren’t partners in tenants’ businesses — they don’t typically benefit when a tenant does extremely well and therefore shouldn’t have to supplement them when business is poor.
Tom Jaros suggested that the legal issues most often encountered during the early stages of the pandemic primarily focus on lease amendments, including grants for rent deferrals and loan forgiveness, all stemming from the massive disruption that has been caused by COVID-19.
“Managing these day-to-day issues is consuming a lot of effort,” he says. Looking ahead, Jaros added, “I think you’ll find loan collection and other issues materialize later in the summer, but for now it’s the bread and butter real estate work.”
Dan Rosenberg concurred with Jaros and suggested that the bigger troubles for the industry, relatively speaking, may come to fruition further down the road. The consensus among lenders was that in terms of forbearance, banks have been granting a range of 3-6 months. Life companies have been acting similarly, but more on a case-by-case basis.
People are figuring out a three to five month band aid,” Rosenberg says. “I think the real trouble will start in late summer or early fall.”
He also expressed concern over whether the industry is ready for a second wave of COVID-19. For now, Rosenberg agreed with Hochberg that, for the most part, lenders are playing ball. His best advice for clients is “be transparent, document everything and don’t come across as being too opportunistic.”
David Benz also raised a cautionary tone as he addressed a variety of issues related to the PPP stimulus package as well as potential changes to tax regulations that would impact 1031 exchanges.
He called his disappointment in new Treasury guidance “an understatement” adding that they came out with new guidelines, but rather than definitive measures they opted to release information through a document of responses to FAQs (frequently asked questions), which are not legally binding on the IRS.
While Benz does not anticipate significant changes to the tax code, he advised that 1031 investors “need to be careful of the unintended consequences” of any changes that would occur. Similarly, he also suggested that any future stimulus package offerings being carefully scrutinized for employment and tax credit consequences that could occur when taking advantage of certain measures.
When looking at retail performance levels, Hochberg said the clear winners at this stage have been grocery stores because of the essential service they provide. The real question, however, especially for shopping center owners, is how the satellite space, the space around the grocery stores, is performing. That, he says, is where the money is made; and it’s a challenging time right now.
Hochberg recalled that 30-45 days before the pandemic took hold, he attended an experiential retail conference on the West Coast where the primary focus was attracting experiential tenants to fill vacancies and creating the best customer experience possible. How quickly things changed, as restaurants, entertainment and other experiential uses closed their doors, relying solely on goods that could be picked up curbside.
In looking at the marketplace from a broader perspective, Hochberg suggested that there is no such thing as a good property or a bad property; instead it’s buying at the right price. “The challenge right now is pricing discovery,” Hochberg said. “It’s about valuation and basis right now; where buyers and seller want to be and defining the price point at which a transaction makes sense.”
There is a big spread right now, that sellers are at the point they were 90 days ago, and buyers are looking at a point perhaps 90 days down the road.
A familiar refrain from the panelists was there is very little investment activity at this time.
“How do you buy, sell or finance a property if you don’t know the cash flow stream, because you don’t know who is paying rent now and who will be down the road,” adds Rosenberg.
“People will look back and say, ‘That was the COVID Spring’,” Jaros said. “That will explain things.”
While transaction activity may not be happening right now, there remains a lot of liquidity in the market.
“Single tenant net lease is getting done because you know who is paying the rent,” Rosenberg says. “Industrial is getting done as well as we all order online and have it delivered.”
Jaros agrees that price discovery will come through, and we will find a new equilibrium, but not for a period of time. When comparing the current economic climate to either the great recession or other bad economic climates, Jaros says everyone views this as a temporary cash flow situation as opposed to a valuation crisis.
Today, according to Jaros, “it’s about weathering a storm versus reinventing yourself after the storm.”
Jaros predicts a “sea of change” in lease docs. “There will be an attempt to balance the playing field,” he says. He also predicts that some landlords may look to have the ability to terminate a tenant if they claim force majeure and don’t pay rent.
“In the end, it may be about getting what you need, not necessarily what you want,” Jaros concludes.
