Until COVID-19 officially took hold in the U.S. in March of 2020, the U.S. real estate market was active, even robust. Starting in March, however, the possible scope of the pandemic and the sudden imposition of stay-at-home orders resulted in deal volume falling precipitously—with sales, leasing and lending transactions being put on temporary “wait and see” pause or terminated altogether.
The impact of COVID-19 on the real estate market has not been felt evenly. Hotels have been hit extremely hard, with many hotels shuttered altogether and many others only open at staggeringly low occupancy rates. Retail likewise has been virtually shut down in various parts of the country—with retailers across the country asking for rental forbearance or lease surrenders and others, such as J Crew, Neiman Marcus and Pier 1, pursuing bankruptcy reorganizations or liquidation. Multifamily has also been relatively hard hit, and landlords are having to navigate a web of local, state, and even federal regulations regarding tenant protections, such as non-eviction orders. The least affected sector so far has been office—however employers and office space users who are becoming facile with zoom and “working at home” may well re-examine their usage of office space—and it is within the realm of possibility to imagine that even this sector may come under pressure over time.
In the short term, in the world of lending, borrowers and lenders are generally trying to navigate this period by means of forbearance or loan agreement modifications such as reserve re-allocations (although of course, in some cases, lenders are pursuing their rights and remedies (for example, UCC foreclosures in the context of mezzanine loans)). Often, these discussions begin with a short Pre-Negotiation Agreement before proceeding on to the negotiation of a Forbearance or other Modification Agreement. There can be particular sensitivities in asking for forbearance. To name a few, a request may cause a CMBS loan to be transferred to special servicing—guarantors should first determine whether a poorly written request for forbearance may be viewed as an admission of the inability to pay debts as they become due, triggering recourse—and granting forbearance (as a lender) may require the consent of co-lenders or “other” lenders in a structured debt stack. Even for those borrowers who are able to service their real estate loans, borrowers may be dealing with numerous tenant requests for “rental” forbearance (or other) and will first need to obtain their lenders’ consents prior to agreeing to any such amendments. Successfully making it through this period will require careful planning (and, of course, ideally, reserves and cash on hand …).
As for the players in the market with cash on hand, opportunities will abound in all parts of the U.S. real estate market—whether it be in the context of distressed loans or assets—as the market prices in the long-term effects of Covid-19.
Want to hear more on this topic? Listen to our Pillsbury Industry Insights Episode #7: Real Estate and Financial Strategies featuring partners Joel Simon and Caroline Harcourt.