By Joshua Burd
Commercial real estate still holds opportunities for both sellers and investors — including those in New Jersey — provided they can navigate the challenges of the COVID-19 crisis.
That was the message from experts who gathered Friday for a virtual panel discussion on the state of capital markets in the Garden State and elsewhere. Hosted by the Urban Land Institute of Northern New Jersey, the program focused on everything from closing deals while socially distancing to rent collections and other underlying fundamentals for commercial real estate.
“These are obviously very challenging times,” said Jose Cruz, a senior managing director with JLL, who moderated the panel. “COVID has taken its toll on the investment community, but at the same time, we still see that there’s debt in market available for real estate, there’s equity out there and there are groups that do want to transact, both on the sell and the buy side.”
John Lamb, a senior managing director with BlackRock, said he had expected to be active in the first half of 2020 with the belief that the presidential election would create a slowdown in the second half. Now that the pandemic has caused sellers and buyers to hit pause, he said, there could be pent-up demand once the economy reopens.
“My assumption is that, if we all get back to work, the second half will be busy,” Lamb said. “But I’m still quite concerned about that.
“Where we do think transactions will happen is in the major metros. Around New York, New Jersey, Connecticut, we have a lot of capital, we have the acquisition officers, we have the capital buckets, the lenders are all here,” he continued, noting that the company also has offices in major markets such as Atlanta, Boston, Chicago, San Francisco and Newport Beach.
“So I think deals there — where people can go travel in their own cars, do tours after hours — I think that will occur.”
Other panelists echoed that belief, while also noting that the fundamentals for higher-end, well-located properties remain healthy or at least durable under the pressures of COVID-19. Joanna Rotonde, a senior manager with Regency Centers, said the real estate investment trust in April collected more than 60 percent of its base rent across its portfolio of 416 shopping centers. That’s all the more notable, she said, given that more than 80 percent of Regency’s properties are grocery-anchored, but only 43 percent of its tenants are considered essential retail and services.
The REIT strives to be a “discerning buyer,” one that seeks to sell off higher-risk, lower-growth assets as it acquires higher-end properties, Rotonde said. The current environment has put its disposition strategy in a holding pattern, but she is optimistic going forward.
“This is a different experience than 2008 and (2009),” she said. “I think there’s going to be a lot more capital flowing to a lot fewer places, but there is capital out there. We are interested and hopefully will play offense here shortly once we all are open and understand what this new normal is.”
The high-end multifamily market has also proved resilient, panelists said. Greg Belew, LMC’s divisional president for New York and the tristate area, said the developer has seen tour activity bounce back at its new 180-unit project in Jersey City.
“Obviously we had a pretty big fall off in activity starting in mid-March, but we’re seeing a pickup,” said Belew, whose company is subsidiary of Lennar. “We’ve had a fairly consistent amount of lead generation, so still a lot of interest out there. I think there are renters that are maybe just not quite ready to start pulling the trigger, but we have seen an uptick here over the last week, week and a half, so we are starting to see some decent lease volume happening.”
He also said the firm’s lease volume nationally, as of early May, was up 50 percent week over week, “so I think that the trend is going in the right direction.” Rent collections in April were in the mid-90s, he added, although the data may mask what is an underlying issue for the apartment market: the disparity between luxury buildings and Class B and C properties.
As Belew noted, residents of high-end buildings — who often have portable, white-collar jobs — are seemingly less subject to the layoffs or furloughs that have hit millions of workers nationwide, “so I think that probably explains the differential between what we’re seeing in our portfolio and what you would see if you looked at the entire multifamily market nationwide.”
Lamb said the crisis could expose disparities within asset classes and within individual markets. And despite their cautious optimism, the panelists also pointed to the headwinds that still exist: Multifamily owners have had to increase concessions in recent weeks, while they will face a challenge in reopening amenity spaces that have been closed during the past two months.
While rent collections have held steady thus far for many office buildings, the panel said landlords should also be ready to provide additional concessions, free rent and higher tenant improvement allowances. As occupiers return to work and seek space in the coming months, owners should also brace for the challenge of trying to implement social distancing guidelines in crowded buildings and workplaces.
Those headwinds have undoubtedly startled lenders.
“If you went out before and you got seven term sheets on something, maybe you’re getting three or four,” Belew said. “Lenders are maybe not quite as active or quite as bullish as they were, but I think the market is still open.”
That’s not to say that the panel was closing the door on new development in the near term. Michael Keyes, senior director, acquisitions, with Intercontinental Real Estate Corp., said the firm would look for opportunities both in markets in which it has a physical presence and in those in which it has a joint venture partner on the ground.
The company, which raises a large portion of its equity from pension funds, would also look favorably upon projects with union labor.
“We’re open for business and I think we’re especially open for business given we have a lot of New Jersey Taft-Hartley union pension plans,” said Keyes, whose firm has partnered with Bijou Properties on several projects in Hoboken. “If we can get a construction project going in Jersey in the next six to nine months, it’s a good thing for our investor base.”
Landlords and their tenants are also seeking solutions that will help them get back to business. For instance, Rotonde said restaurants will be hard-pressed to open at less than 50 or 60 percent occupancy without losing money, so Regency is looking into whether they can use sidewalk space, parking lots and adjacent vacant units to help them add capacity.
The REIT is also exploring those strategies for other types of retailers, she said, noting that being a national owner allows it craft best practices as individual states loosen their restrictions.
“We’re looking at everything, we’re doing the best we can to help all of our tenants,” Rotonde said. “But we definitely are in the phase of just understanding what we’re able to do and then what is working in other states to try and make it better and refine it as we open up other shopping centers.”