What is actually happening in commercial real estate right now? No one knows. I’ve been in the business as a landlord, broker, asset manager and (aspiring) developer for 15 years and I don’t know. Two of the smarter and more experienced people I know in the business, Richard Lake and Gary Rappaport, have said effectively the same thing on separate Zoom calls: They don’t know the future of real estate right now. No one does. All the indices and the surveys and the pricey big data subscriptions don’t tell us anything yet. What can give us some insight is, for lack of a better term, word on the street.

“Cops lie, newspapers lie….the one thing you can count on is word on the street. That’s solid.”

-Charlie Barrett (AKA Carlo Bartolucci)

The plural of anecdote actually IS data. (It’s been commonly misquoted that it’s not. Find out the origin story here). Yesterday, New York residential broker Chaka Smith and I hosted a Zoom call with a small group of Mid-Atlantic real estate practitioners. We’ll be doing follow-ups for different geographies, asset classes, and types in the near future. If you have a suggestion or want to join/host one, contact me here. Here’s what we learned (names have been changed to protect the innocent).

Chase Manfred, Affordable Housing Developer, East Coast:

1) Equity that is exposed to retail and hotel are out for future deals

2) There is no financing for hotel/retail projects at the moment

3) There is still money for workforce/affordable housing but you need to UW up to 40% vacancy and bad debt, take into account higher DSC requirements and UW up to 12 mos interest reserves

4) This will further widen the bid/ask as sellers need cash and just can’t take fire sales right now

5) There will be opportunities but you have to find the distressed equity.

6) Debt levels are fine except for GSE loans, but you can’t buy those from master servicers since they are still getting government guarantees, and there is no incentive to work those deals out

Dub McLaren, Office Broker, Washington DC:

  1. Office sales are moving, especially those tenanted by governent and institutional users
  2. “Predatory retailers” withholding rent as a cash strategy
  3. Attorneys are hard at work figuring out if force majeure can be applied to agreements
  4. For existing transactions, both sides moving forward
  5. Office upgrades and construction are moving quickly because of “essential business designation” and ease of doing construction without having to work around office users

Brockton Speed, Investment and Retail broker, Maryland

  1. Transactions in in the one million to ten dollar range that were initiated Pre-Covid are continuing to closing. Smaller transactions are falling out of contract
  2. Municipalities are still active in finding space, in somecases because of COVID-generated needs
  3. 70–80% of tenants across their portfolio paid April rents
  4. Some investor interest in bargain hunting

Octavio California, Residential agent and SFH Developer, Washington DC

  1. Home prices are maintaining and transactions continuing, but there is a noticable shift toward a “buyer’s market”
  2. Inventory is extremely low, as sellers pull listings from the market or delay listing
  3. There’s still a severe lack of trust in virtual tours and no one is buying based on a Matterport walk-through
  4. Landlords with voucher tenants are extremely happy, Market tenanrts have been a mixed bag.
  5. Hard money and construction financing has tightened up considerably. Cash buyers for distressed homes are in the driver’s seat

Alistair Watanabe, Hedge Fund Partner and Affordable Housing developer, Tri-state

  1. Commercial lenders re-analyzing how they underwrite loans
  2. Paralysis in the secondary marketplace is drying up liquidity. Hard to even find an FHA lender who will fund at less than 640 FICO scores
  3. 50 unit and under rental projects tough to finance right now but their national lender partner is continuing to perform on a pre-COVID initiated deal

Big Takeaways

While it’s obviously too early to predict what will happen in any given market, and these are very siloed data points, we can start to see little glimpses of the short term facts on the ground:

  1. Home prices in supply constrained markets will maintain for a little while as sellers who aren’t at risk of foreclosure or adverse lending action simply don’t sell.
  2. Rent collection has been surprisingly strong across a number of assets. While there’s no telling what May will bring, it suggests there may be less distress than we think in the short term.
  3. Lenders are not abandonng the market, but they are tightening up credit considerably. If you’re a small operator, consider teaming up with someone with a balance sheet to get things done.
  4. Now is the time for building owners to make CAPEX improvements. As I mentioned in another post, COVID is going to turbocharge a number of Proptech solutions, from touchless entry to virtual tours, to super-clean HVAC and sensors, and on an on. Easier to do it now while everyone is gone and before putting tons of SF on the market.
  5. Distressed sales aren’t happening. Yet. Grave dancers are best served using this time cultivating relationships and getting their powder ready to deploy.