Tales From the Front Line | April 6, 2020

As we move into the third week our experts in the field have much to share about where this last week has taken us and, more importantly, where opportunities lie.  We have also received additional comments from the field from your fellow ULI Chicago members, so I invite you to take a minute and read those.  As always, we invite you to join the conversation by emailing us.

My Best –
Cindy McSherry | Executive Director | ULI Chicago

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

Week  3 in the real estate  world of COVID-19 seems like the first week of the “new normal.”  We may not like what this short-term normal is, but there weren’t any major surprises during the week.  The public equities markets stabilized and corporate bond yields started to compress.  However, the private real estate capital markets were generally slow.  While committed transactions continued to close, few deals were being made.  Buyers are underwriting ultra-conservatively and sellers aren’t going to sell unless forced to.  The most active lenders in the market were primarily the government agencies (Freddie/Fannie) and smaller, regional banks.

Other than the stabilization of the market, the biggest event of the week was the release of regulations of the CARES Act, the official name of the stimulus program.  One important component of the plan will push up to $349 billion of “loans” to small businesses who employ fewer than 500 people.  These loans are effectively grants that cover payroll, benefits, rent, and mortgage interest for small businesses.  Every bank with a SBA license is now pushing out these loans as quickly as they can.  While the rollout has not been without its flaws, the importance of this capital will help to stabilized cash flows for millions of companies and will, by default, help stabilize cash flows in real estate assets.

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

My work-from-home desk is a table in the bay window of our living room, from which I can see the traffic on our street. It has shifted since the shelter-in-place order. Bicyclists now outnumber cars. Dog walkers dominate, along with people pushing strollers. The highlight came yesterday. A father and son walked by. The dad was casually dressed, the son less so. The kid – aged five, perhaps – had a light saber in hand and a Darth Vader mask on his head. It was a fitting outfit for such a risky time.

For those of us who were in the work force in September 2008, it would be reasonable to assume that we had seen the worst economic shock of our lifetimes. How wrong we were. The reactions by US corporations to Lehman Bros’ failure on September 15, 2008 and the stock market sell-off it triggered were quick and sharp. Claims for unemployment insurance doubled over the next six months, rising from 300,000 per week to a little over 600,000 per week, and the unemployment rate began a sharp climb, topping out at above 10% in 2009. Bad, but nothing like what we saw this week. The pandemic has pushed the globe into recession. It’s something of a rolling recession, with those places where the virus struck earliest getting back to work now, sort of. China represents a test case and its experience shows the complexities of this recession. A public health crisis took down the Chinese economy. As its factories get back on line, the global recession is limiting demand.

We don’t yet know how and when this economic crisis will end, because it was caused by a public health crisis. That crisis rolls on, with no vaccine for the virus and no clarity as to whether nations will have the will to take the steps necessary to limit its spread. What we do know is that real estate is tangled up in the economic pain households and businesses are feeling. April 1 has now passed. The requests for rent relief are numerous. My favorite came from a firm that suggested it wouldn’t be paying rent for the next four months and that if we didn’t like that we could sue them. Renewals are up year-over-year as tenants elect to stay where they are until more is known. This crisis will create opportunities. One of them will involve creating spaces that make us feel as safe as that kid with the Darth Vader mask on did.

TERRI HAYMAKER
Senior Vice President of Real Estate Solutions | IFF

As the world health and economic crisis deepens, it’s no surprise the nonprofit sector has been operating in a bit of a scramble mode as our situation is constantly changing.  Many organizations who had previously created emergency plans have spent this last couple of weeks implementing those plans.  They have been preserving the health/safety of clients and staff, via shelter-in-place protocols, while still maintaining high quality services for their clients.  One of the strengths of nonprofits is their ability to manage change and manage resources to support that change. This skill is clearly being put to the test now.

It is now evident we won’t be going back to the way our world was just a few short weeks ago any time soon.  While we all wish for a crystal ball to know what the future holds, that uncertainty is driving nonprofits to move on to a new set of actions:

• Evaluate the adaptability of programs and services.
• Take stock of current assets and understand potential cash flow changes.
• Secure the resources needed for support during operational instability.
• Run short-term and longer-term scenarios to make key decisions about programs, operations, and facility needs.

Opportunities
There are several unanticipated, yet welcomed, opportunities coming to light during this crisis:

• The flexibility of government to adapt. Government, at the federal, state and local level, has been quick to create flexible funding tools that serve broad programmatic needs for the business sector and the non-profit community. For example, to meet the needs of diverse communities, the Small Business Administration is, for the first time, allowing nonprofits to be eligible to apply for their new emergency loan and other COVID-19 programs.
• Diverse sources of funding. Nonprofits are pursuing new funding sources. Some are considering how new debt can support current and anticipated operations.  Because not all nonprofits are prepared to take on more debt, they are also fervently seeking out and working to secure temporary financial resources newly-created by government and philanthropy.
• Strategic Planning for the future. Nonprofits experiencing a slowdown in programs or partial staff workload are taking advantage of this moment to focus on long-term strategic planning they normally don’t have the capacity or availability to pursue. They are taking a long view toward new or modified program opportunities, including ones to better serve populations who have not had access to services, capital, and growth opportunities in the past. Through that lens, they can see new real estate opportunities which support additional or expanded programs coming out of the strategic planning work and those opportunities which may not have existed before the crisis.
• Capitalize on real estate assets. Nonprofits can use their net assets to strengthen their financial capacity, weather this current storm, and plan for long term stability. Nonprofits who were planning for, or underway with, new development projects are, for the most part, continuing down their path during this crisis. A new construction or large renovation project for a nonprofit can be a once-in-a-decade event. These projects are not entered into lightly—they are strategically planned and can position nonprofit organizations to grow capacity, create more opportunities, and build resiliency, especially in times of crisis and unexpected change.

Molly McShane
Chief Operating Officer | The McShane Companies

In comparison to the last several chaotic weeks, this past week has been relatively stable. Work continues on about 95% of our active construction sites across the country. Most municipalities have clarified that construction is an essential business, and we continue to enforce new health and safety procedures. Last week I mentioned potential delays due to reduced crew sizes and the sometimes-slower pace of inspections. Up until this point, we have not seen significant delays due to shortages in materials. However, we have recently been made aware of a handful of large suppliers that are shutting down their North American production lines, which could undoubtedly have significant ramifications in the coming weeks and months. Navigating these challenges effectively will prove critical.

The development industry includes a wide range of entity structures – from private developers to publicly-traded REITs. Unsurprisingly, many of these businesses are facing their own unique set of circumstances and economic pressures, including tenants’ inability or unwillingness to pay their full rent. Many tenants are asking for some form of rent relief. I have anecdotally heard of some creative negotiations that give current relief in exchange for movement on other points within the lease, such as term extensions or removal of termination options. Some development sites look to shake loose as a result of the shift in focus to maintaining existing cash flows. There continue to be opportunities for winners and losers on a deal by deal basis.

The top priority for many this week has been the application process for the Paycheck Protection Program element of the CARES act. Although, in many respects, this has been a moving target, the potential impact that this money could have on the economy should not be underestimated. Many are predicting that the current allocation of funds will be insufficient given the level of demand, and there may be more money approved later on.  The scale of the demand for funds from the PPP, as well as the payment (or non-payment) of both rent and loans which were due this week, should provide further insight into our environment next week.

JON TALTY
Chairman & CEO | OKW Architects, LLC

As we watch cities across our nation battle the Covid-19 pandemic, the debate in kitchens and GoToMeetings alike has again begun: is density a good thing or bad thing? As a veteran of cocktail parties that have carefully skirted the topics of religion, politics, and building height, I have heard both sides of this debate.

Let’s start with the pushback.

It’s easy to see why China and Italy are more vulnerable to the spread of the virus. Their density promotes interaction and provides a template for contagion. In both of these countries, extended families live very close to each other and regularly interact. In Italy, this has resulted in a disproportionately high death toll for its elderly population. Across the Atlantic, New York City has been seeing an alarming spike in cases, not entirely due to its teeming concentration of people.

My hope is that here in the United States, we do not look at the Big Apple as the poster child for urban density and determine that we need to spread out. Our cities need connectivity and compactness to be their best, both in terms of providing its residents access to resources and bringing them together as a community. Density also provides us with choice: of neighborhoods, restaurants, and businesses as well as healthcare and education. If one option does not meet our needs, perhaps another will. Density is walkability, engagement, and identity.

In a way, density can be liberating. If everything you need to live a full life is within walking distance or a short transit trip, a city can give every resident, regardless of age, the agency to make key decisions about how to lead their lives.

At a time when our nation is as bifurcated as it is, we need to come together, literally. Although we are being asked to flatten the curve, now is not the time to flatten the landscape out of anxiety. We need density to support an ever-changing Main Street, to offer housing to both affordable and aging marketplaces, to support new businesses and initiatives, and bolster the communities that will help us through this and the next crisis.

I have had several conversations in recent months about the evolution of Chicago’s skyline, more than once hearing someone wish that it still looked like it did decades ago. I respectfully disagree. The change we have seen to our city is not only beautiful but necessary. That same change needs to redound to the communities across Chicagoland and the cities that connect us across the US. We cannot let the potential transmission of a virus hamper responsible evolution. To do so would mean separating us from each other and everything that makes us human.

We need to remind ourselves what that means. It is time with our neighbors, the sounds of kids in the streets, participating in the monthly music festival or block party, running along the lakefront, and finding strength in numbers. Chicago, New York and Los Angeles, cities of neighborhoods, will experience very different summers for sure. But once the dust settles, I hope our recovery reminds us that we long for connection and that we are stronger together than apart.

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We’ve received some thoughts from other ULI Chicago members, so today we’re sharing some additional “Comments From the Field”:

• AARON GALVIN | CEO and Founder | Luxury Living Chicago Realty
  Read Aaron’s Bio
  “April is the start of the busy multifamily leasing season and while we are not seeing traditional velocity numbers, the current crisis has disrupted but not derailed momentum. Here are the top three trends we saw this week in the multifamily market.”   Read Aaron’s Complete Comments
• HEATHER MORRISON | CEO | MAP Strategies
  Read Heather’s Bio
  “Managing risk and constantly pivoting in the market and in life is what real estate professionals are made of. In our way, we all are uniquely qualified to take on this crisis and adapt quickly. I’ve proudly witnessed architects, developers, City officials and my own staff ramp up the remote work platform seamlessly and be efficient to keep projects moving forward.”  Read Heather’s Complete Comments

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