By Michael G. McGuinness
My original plan for this Earth Day was to report on New Jersey’s sustainability challenge and how commercial real estate is adapting to natural, governmental and market forces. Given the magnitude and velocity of the COVID-19 disruption that is hourly reshaping our economy, industry and very existence, that plan quickly evaporated. Instead, this piece discusses the general impact of COVID-19 on our economy, and how CRE developers, owners, asset managers and affiliated professionals are meeting these challenges, assisting in relief efforts and informing government at all levels on how best to navigate their strategic response.
The good news is that we came into this crisis with record low unemployment, low interest rates and plentiful jobs. The bad news, according to many economists, is that we must expect a severe downturn in the second quarter. Experts say the virus will gradually diminish by summer. In the interim, “as investors, we need to rethink our long-term strategic goals, review our existing portfolio and realign to goals, evaluate existing debt, organize financial paperwork (lease abstracts) and engage and collaborate with partners — lenders, tenants and brokers,” stated Al Pontius of Marcus & Millichap at a recent webinar for NAIOP members across North America. Timothy H. Savage, Ph.D., of New York University’s Schack Institute of Real Estate, recently commented that, “We have to recognize that this is not a financial crisis … this is a natural disaster … in which it is not the physical capital that is being affected — it is the human capital — each one of us essentially isolating ourselves, and that directly impacts the economy.”
Very decisive federal stimulus action, the CARES Act legislation, is also very good news, given the breadth of its unlimited quantitative easing to maintain the liquidity of the market and ensure that businesses can maintain lines of credit. Specifically, it includes: (1) an aggressive loan (forgivable) program for small businesses (tenants, etc.) to help with financial obligations and meet payroll; (2) a correction in the tax code to allow, retroactively, depreciation over 15 years for Qualified Improvement Property (QIP); and (3) Net Operating Loss (NOL) rule changes allowing businesses to carry back for five years any losses from 2018, 2019 and 2020, and losses carried forward can offset 100 percent of taxable income. Additional provisions in the CARES Act and other federal actions already taken will be much-needed help for our economy.
Closer to home, CRE professionals are dealing with problems related to keeping their businesses open by: working remotely through technology; managing tenants and keeping properties safe, sanitized and secure (BOMA International has released a Coronavirus Preparedness Checklist); conducting appraisals remotely by accessing digital files with internet and phones during extreme market volatility; dealing with labor shortages due to shelter in place orders; and navigating supply chain disruptions and unavailability.
Rightfully, law firms are busy counselling and representing both landlords and tenants on a host of issues, including business interruption and commercial general lability insurance, and labor and employment issues (reasonable accommodations, health inquiries, testing employees, telecommuting, pay and benefits during closures). Requests for rent abatement are growing in demand. My quick take on this topic is that landlords are encouraged to work with their tenants to ensure that both you and your tenants are back up and operational as soon as possible. All such requests should be in writing and include a rationale along with proof of financial need. Effective communication with tenants is key to avoiding liability issues. Many businesses are trying to rely on the “Force majeure” provisions in their contracts and leases to be freed from the payments called for in these legal documents. Not all such provisions afford the contracted individual a defense against a claim for “failure to perform or frustration of purpose,” especially where the contracted party has not complied with the mandatory notice provision (if applicable).
As CEO for NAIOP New Jersey, I have been invited to participate on regular tri-weekly calls with Gov. Murphy’s point people who are overseeing the state’s strategic response to the pandemic. Along with leaders from the business community, regular participants include Joe Kelley of the Governor’s Office Economic Development, New Jersey Economic Development Authority CEO Tim Sullivan and Labor Commissioner Rob DeAngelo. These calls for help and action are both sobering and refreshing, as we have direct access to those who can rapidly effectuate public policies to address the myriad problems that have resulted from the executive orders and state shutdown of all but essential activities (“essential” currently includes facilities used for warehouse and distribution centers, logistics, trucking and other industrial port-related activities).
These conversations have led to solutions for: resolving critical utility hookups and interior work by utilities for essential facilities; directing municipalities to accept electronic payments; guiding municipalities in how to uniformly conduct virtual planning and zoning board meetings; directing municipalities to continue with local inspections, certifications and approvals and allowing for the design professional or firm associated with the project to approve the completed work and document the process with before, during and after pictures or videos; and expediting pending “pre-approved” state permit applications. NAIOP is part of a coalition of business groups that has called for the extension of all rule-making calendars, including rule proposals, adoptions, comment periods, stakeholder meetings and public hearings; the extension of all state and local deadlines associated with statutory mandates, regulations, local ordinances, permit applications and conditions, grants and filings; and a host of economic recovery initiatives after the pandemic subsides.
In response to Gov. Murphy’s plea to assist with relief efforts, NAIOP New Jersey members stepped up generously by identifying over 1.5 million square feet of space (nearly half in Bergen and Hudson counties) for potential conversion to makeshift intensive care facilities and other emergency operations used to support first responders and those infected with COVID-19. It is truly heart-warming to know that the Meadowlands Conference Center space (donated by Hartz Mountain Industries) is being transformed by the U.S. Army Corps into a field hospital to be open April 3. We are also working closely with the Port Authority of New York and New Jersey and surveying industrial members to identify their warehouse capacity and continued ability to process containers in the upcoming months. The goal is to mitigate further adverse impacts on the region’s supply chain.
The reality is that this “economic problem is not going to be solved in a bank or in a brokerage or on the trading floor of the New York Stock Exchange. It’ll be solved in a laboratory. The brilliant minds who work in global life science are going to save the day,” referring to those working on treatments and vaccines for COVID-19, according to Anirban Basu, chair and CEO of Baltimore’s Sage Policy Group at a recent webinar for members of NAIOP’s DC|MD chapter.
Professional business and trade associations, especially those that focus on advocacy like NAIOP, are built for these times. Expert and dedicated staff have the skills to get timely and relevant information to members. We also have the trusted relationships and connections with key government decision-makers at all levels to inform and guide their strategic response. As we muddle through the upcoming months, please be generous and compassionate with those you engage with — family and friends, employees, tenants and communities. Our world, as we knew it, has collapsed.
Michael McGuinness is CEO of NAIOP New Jersey and has led the commercial real estate development association since 1997. NAIOP represents developers, owners, asset managers and investors of commercial, industrial and mixed-use properties, with 830 members in New Jersey and over 19,000 members throughout North America.
