What’s Developing in Our CRE Market

by Suzanne Kinney

Lobby of 2700 Tower on Central Avenue in Phoenix; courtesy of NAIOP

Building owners are focused on two issues right now: making rent payment arrangements with tenants whose operations have been impacted by COVID-19 and ensuring that their buildings provide a safe and healthy space for essential workers who must continuing coming into the office.

Regarding rent payments, building owners had to rapidly put protocols in place to determine which tenants have been directly and severely impacted by COVID-19 to the point they are unable to pay their rent. These typically include tenants that have been required to temporarily close their operations or have suffered dramatic decreases in revenue and do not have sufficient savings to weather the shutdown. Many other tenants have been able to continue operating, albeit in a virtual manner, with minimal disruption to their finances. Building owners are working with tenants to help them apply for federal Paycheck Protection Program loans and other sources of emergency funding from the government that can be used in part to pay rent. Each tenant’s situation is different, so building owners are working to find customized solutions that will enable their tenants to get through this difficult time and reopen in their same location once the pandemic has subsided.

Building owners must continue to pay mortgages on their buildings despite experiencing a dramatic reduction in rental income. For buildings that are primarily retail or hospitality, this is incredibly difficult. The owners may be receiving nearly zero rental income. Therefore, owners are reaching out to their lenders to request forbearance on their mortgages in order to avoid foreclosure.

For offices, warehouses and manufacturing facilities that serve businesses deemed essential, owners have put rigorous cleaning and disinfecting protocols in place. This often involves a thorough cleaning several times per day. They are working with tenants to assist with social distancing among the workers who remain. In addition, they have instituted procedures to fully disinfect any building where a worker has been diagnosed with COVID-19.

Construction companies, which have been deemed essential businesses (which means the construction of new buildings can move forward), have modified their practices to ensure workers maintain a safe distance from each other. Fortunately, the construction industry is accustomed to rigorous safety standards, so modifying these to accommodate new health considerations has been relatively straightforward. These companies are also helping healthcare workers on the front lines. NAIOP member Willmeng Construction recently donated all of its surgical-grade face masks to doctors at Honor Health who are treating coronavirus patients.

Ascend at Chandler Airport Center leased by Ascend Northrop, LLC; courtesy of NAIOP

Other challenges in our industry have come from many sides:

During the pandemic, it has been difficult to complete certain real estate transactions. Investors need to be able to physically inspect any building they are considering buying. Travel restrictions have made physical tours impossible. Virtual tours help but are not a complete substitute for inspecting a property in person.

In addition, many services providers that are involved in the real estate process are operating remotely or with limited staff. This may include title companies, law firms, environment consultants and appraisers. This has caused delays in some case.

For new construction, some city-level permits and approvals have been delayed. This is due in part to public participation requirements that cannot legally be met with technologies such as video conferencing.

The financial fallout from COVID-19 has resulted in tighter lending practices. This is making it more difficult for investors to access the capital they need for major real estate projects.

Moving forward, certain changes to the internal layout of offices may become a new standard, at least in the short term. This could include new design standards that space desks farther apart or that reimagine building entry and exit procedures to facilitate social distancing. In some cases, it may involve workers coming in on different shifts to prevent too many people from being in the office at the same time.

More extensive cleaning will become the norm. This will likely involve more frequent cleanings and deeper cleanings that fully disinfect all surfaces.

This is one part of the June 2020 cover story on industry impact of COVID-19. To see the full story, click here.

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