Once again our community comes together to share advice, expertise and most importantly, provide friendship in a time of sheltering at home.  I invite you to grab a cup of coffee and read a few stories from our friends.  And if you want to join our conversation, feel free to email your stories to us.

Have a Good Week.
Cindy McSherry | Executive Director | ULI Chicago

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Tales From the Front Line | April 13, 2020

KEITH LARGAY
Senior Managing Director, Chicago Office Co-Head | JLL Capital Markets

It has been four weeks working from home, though I must say it sure feels like longer than that.  I guess the lack of person-to-person social interaction is getting to me.  For me, WebEx and Zoom meetings can’t take the place of real engagement.  The big news over the past couple of weeks has been the rebounding of the public markets.  The S&P 500 is up over 25% off its lows and investment grade bond yields have tightened significantly, all despite 16 million people filing for unemployment over the past three weeks (10% of the workforce).

Equity Markets
While there is clarity in public market valuations, there is no clarity in the private real estate markets.  How do you value private real estate with so much uncertainty and volatility in the market?  This is an especially challenging question to investors in the fund business.  They are required to value their portfolios on a quarterly basis, providing their investors with a spot market valuation that is used to value their portfolios and set prices for investment/redemption in open-end funds.  With COVID hitting at the very end of the quarter, most fund investors are simply punting.  Instead of guessing on value adjustments, many have decided to keep values flat from Q4, see how performance shakes out over the next three months, then make valuation adjustments at the end of Q2.

With continued uncertainty, the transaction market has continued to slow dramatically.  Most investors have decided to put off marketing their assets until there is greater clarity in the market.  Even those of us in the capital markets business struggle with valuation.  On a recent office valuation for a client, we provided a baseline pre-COVID valuation as a reference point.  We then provided a post-COVID valuation assuming a base-case, optimistic case, and more negative scenario on valuation.  These resulted in valuation decreases on the asset of 5%-20%, depending on the assumptions.  But nobody really knows and are assumptions just that, assumptions.

Debt Markets
Debt markets typically respond faster to market changes than private sales transactions given that investment grade bonds are used as the benchmark for pricing.  With continued spread tightening in the market, we have seen some new signs of life from portfolio lenders.  The greatest amount of liquidity in the debt markets continues to be from Freddie and Fannie.  They continue to sign up billions of dollars per week in multifamily loans.  Rates continue to be low in the high 3% to low 4% range.  However, they have added significant structure to their loans including requiring 6-12 months of interest reserves at closing to ensure debt service in the event of significant declines in collections.  Life insurance companies are starting to dip their toes back into transactions though leverage levels are lower.

One thing I am certain of is that whatever I write this week is likely to be wrong by the time we revisit this topic next week.  Nobody really knows how long this lasts.  Are we out of this after 8  – 10 weeks like China and quickly recover?  Or does this take a lot longer?  Once we get back, do we have the systems in place to ensure that we don’t have a rebound?  Remember, our reported COVID cases are now 5x higher than China’s even though our population is only ¼ of their 1.2 billion people.    Stay  healthy, safe, and sane!

 

MARY LUDGIN
Senior Managing Director & Director Global Investment Research | Heitman LLC

To talk of green shoots at this time of year seems appropriate. And being able to speak of positive things is especially important in a week when the economic news on a domestic and a global basis was so stunningly bleak. So, I’m going to focus exclusively on positive developments this week. First, Wuhan residents were freed of the restrictions that kept them home bound for more than 70 days. We will learn a lot as they make their way around Wuhan and beyond. Second, the average daily new infection numbers are coming down in countries like New Zealand and South Korea that have instituted the most strenuous social distancing policies. Third, we’re now 10 days into the month, the day by which rents should have been paid, and the vast majority of tenants have paid them for the sectors we’ve viewed as defensive – apartments, student housing, medical office, and senior housing. Fourth, there are signs that the capital markets may not completely freeze up this time. It helps that institutional investors are now on their fourth (or fifth) recession. They’ve learned things along the way, like the fact that recessions create unexpected investment opportunities that can help offset the damage repricing and hits to operations do to the value of the real estate assets already in their portfolio. Fifth, the REIT market rebounded this week. REITs typically emerge first from a downturn. One week does not a recovery make but an investment in a company that owns real estate that’s generating income should be an attractive element in any investor’s portfolio. REITs were net buyers of property in the aftermath of the Tech Bust recession of 2001 and again after the Global Financial Crisis. They could lead the recovery this time.

I’ll close with an idea that I hope is true. The combination of finger-prick testing that can tell whether or not you have immunity to COVID-19, and the emergence of protocols to make workplaces safe places to work could get us back to the office by sometime in May I’m hearing. Amen to that! I’ve also hear from an architect on my ULI product council that the virus is causing design firms to think hard about what the post-pandemic office will look like. No surprise, this could mean greater distance between work stations, along with touchless doors and security sign ins, and better air quality. Would that the airlines would follow suit.  Best wishes to you all until we can meet in person.

 

TERRI HAYMAKER
Senior Vice President of Real Estate Solutions | IFF

This week, reports were released showing both the demographic and geographic impact of the health crisis across the Chicagoland area. African Americans are being diagnosed and are dying from Covid-19 at drastically higher rates. For example, African Americans make up 30% of the population of Chicago, but more than 70% of Chicagoans who have died from the virus. The south and west sides of the City and the southern Cook County suburbs also hold zip codes with the greatest records of diagnosed cases.

For those nonprofits working in those communities and communities of color, this is not a surprise. The factors behind this statistic tie directly to social determinants of health, and inequities in access to health care, fresh food, housing, and other economic factors. Human service nonprofits have been focusing their efforts on these factors and the underlying social inequity.

Opportunity: It’s clear that financial, technical, and human resources are needed now more than ever in Chicago’s communities. They have been needed to support the immediate health crisis and going forward they are crucial to address the systemic inequity in communities of color, in particular, across the city. This will continue to be the call for nonprofits. There is an unprecedented opportunity at the doorstep of the broader economic development world. Now is the time and the moment to bring the skills, knowledge, resources, and passion of the real estate development community for equitable growth and development of all of Chicago to the table and to participate in ways we haven’t before. These opportunities exist across the community development spectrum, including:

• Health care, groceries and other key retail goods, affordable housing, education and transportation are key community assets needing creative financing and development scenarios.
• School closures triggered the use of e-learning which quickly brought to light the digital divide that exists. Increased technology and infrastructure are needed to minimize the gap.
• Shelter-in-place caused significant business closings. From this, a highly elevated jobless rate is anticipated. Strengthened workforce development and job training centers will be a vital part of the solution.

 

Molly McShane
Chief Operating Officer | The McShane Companies

This past week saw the construction industry continue to move forward in most markets, while maintaining intense focus on health and safety measures. Some officials are reporting increased public scrutiny of jobsite safety, as construction is a highly visible exclusion to the stay-at-home orders in place throughout the country. Thursday’s nationwide safety stand-down focused exclusively on precautions required in the current COVID-19 environment. You will see more masks and social distancing requirements strictly enforced in denser environments. According to reports, 90% of all Chicago area construction jobs are proceeding, and our business is seeing even higher numbers. As current projects continue to progress well, many in the industry are focused on the pace at which new business is being signed. It will come as little surprise that we are seeing a fair number of new deals postponed, although, as of yet, none of ours have been cancelled. One question that has recently been raised is whether construction costs will decrease as a result of a potentially diminished pipeline. Although it’s too early to make broad predictions, we have heard anecdotal evidence of some subcontractors aggressively pricing new work – presumably to shore up their backlog. We will see more clarity on that in the coming weeks.

As mentioned last week, development is facing a wide variety of challenges. Some public REITs have halted all new speculative development to focus on existing portfolios, and have redeployed “deal people” to asset management roles. We have witnessed some layoffs among private real estate companies, although it would be wrong to call it a pattern yet. Other players continue to push forward, seeing opportunity within the disruption. Many land buyers are taking this as a chance to renegotiate deals already under contract – requesting both extended DD periods and pricing reductions. Longer contract periods are more easily given, but, unsurprisingly, I have not heard of many price concessions yet. As both apartments and industrial are widely expected to survive the storm better than other product types, we see good reason to be optimistic in the medium term. Demographics, e-commerce adoption rates, and evolving supply chains will all sustain a decent level of demand for new product. The fundamentals going into the crisis were, on average, healthy.  Many markets were supply-constrained, so the risk of an extended and catastrophic rise in vacancy rates seems unlikely. However, as is the case in many downturns, we are expecting a “flight to quality”— meaning robust leasing activity for the best locations and newer buildings will return first.

JON TALTY
Chairman & CEO | OKW Architects, LLC

As we enter week four of this now familiar environment where we shelter in place and work from home, this isolated architect continues to seek balance, connectivity and answers. The questions are familiar: when will it end, will it ever end, and what will our world be like when we finally return to normal?

It helps to look to the past for perspective. I grew up in suburban Chicago a few blocks from the Hinsdale TB Sanitarium (that’s tuberculosis for ULI’s young readers). I always steered clear of the buildings and the mystery of their function, but would spend a lot of time in the vast, open spaces that surrounded the facility with my buddies, hitting golf balls, playing baseball, and being a kid. Today tuberculosis is a curable and preventable disease in the US, but in 2017 alone, it was globally responsible for over 1.5M deaths. It is a highly contagious, indiscriminate killer that attacks the lungs and slowly suffocates the infirmed, often disproportionately affecting the urban poor and those without adequate access to healthcare.

Seen in this light, I can’t help but draw comparisons to Covid-19.

As we continue to learn about the novel coronavirus and seek a cure, I think of that sanitarium and its purpose, not as a place to die, but as a refuge for healing. Given the reality of its rapid spread, we are in dire need of additional facilities to house those undergoing treatment and recovering from the virus. I look at our real estate landscape and the noble efforts of friends like John Rutledge of Oxford Capital, who offered top-tier hotels to the City of Chicago to use in the battle against this disease. We’ve seen the re-purposing of McCormick Place, college dormitories, and parking garages as field hospitals and read about United Center transforming into a logistics hub for food and medical supplies.

From all of this, I wonder if a new building typology can emerge from this horrible experience.

What if we designed and built structures whose sole purpose is to house contagion? Think of a wellness center on an institutional scale: a safe, human-centric environment that is specifically designed to isolate people and restore their health. This would be different from a hospital in that it would serve one sole purpose in a holistic and nurturing environment.

We have been told that Covid-19 will never be eliminated. It will reoccur, perhaps seasonally, with the hope that a vaccine will soon be discovered allowing future patients the opportunity to survive the ordeal. The idea of a place for that to happen is not that farfetched. Much like the sanitarium I knew as a child, it would offer open space, fresh air, and a pre-engineered built environment to combat the contagious nature of the disease, allowing for patients to convalesce. Medical professionals who work in such a place could be better prepared to protect themselves from contagion.

The building’s infrastructure could be designed to allow for air to be exchanged and scrubbed, keeping inhabitants as healthy as possible. Architects could design it to allow for some degree of programmatic flexibility in case of extreme circumstances. If specific facilities like these existed, we wouldn’t need to depend on the ingenuity of the private sector and we could leave businesses like the Hotel Felix and McCormick Place to function as they were intended.

I recognize that this might be a tough sell for most people. There’s a reason I kept my distance from the Hinsdale Sanitarium as a kid, and I imagine many residents would voice their objection to the construction of a contagion facility in their neighborhood today. But by the time an idea like this comes to life, we will all have the collective memory of what it was like to live like hermits for months on end, and perhaps we would realize that this new structure is not only good for those who need it, it could improve the long-term health of our communities.

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Here’s an additional  “Comment From the Field”:

AARON GALVIN | CEO and Founder | Luxury Living Chicago Realty
“April leasing activity coupled with lower than expected delinquency rates continues to indicate positive momentum in Chicago Multifamily, albeit far below normal April velocity numbers. Here are the top three trends we saw this week in the multifamily market…”   Read Aaron’s Complete Comments

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If you have questions or want to share your thoughts, email us at [email protected].