Tales From the Front Line | March 30, 2020

This week we welcome Terri Haymaker, Senior Vice President of Real Estate Solutions, IFF, to our panel of experts. IFF is a Community Development Financial Institution offering access to capital, and providing real estate consulting/development tools and resources to non-profits and communities across the Midwest. We look forward to the unique perspective she will bring along with the rest of our experienced professionals!

As always, if you have questions or want to share your thoughts, please email us.

All the Best –
Cindy McSherry
Executive Director | ULI Chicago

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KEITH LARGAY
Senior Managing Director, Chicago Office Co-Head | JLL Capital Markets
District Council Chair | ULI Chicago

Has it been a week already since I wrote this last summary of what is going on in real estate capital markets?  It seems like it was just yesterday.  So much has changed, yet so little has changed.

• What Has Changed – The federal government passed the largest stimulus bill in history, which will eventually flood the economy with money. Hopefully this liquidity enables workers to pay their rent, buy food, and keep part of the economy going.  The equity markets jumped as a result.  And credit spreads started to retreat as investors focused on the stimulus and the Fed’s expansion of its bond buying spree.
• What Hasn’t Changed – Uncertainty. Despite the stimulus, no one knows what near term cash flows at their assets will look like: will their tenants pay rent?  As a result, every acquisitions or loan officer is now either a full-time or part-time asset manager.  While real estate firms don’t know what changes are coming, they want to be prepared.

With all the uncertainty, capital is still challenged on how to price risk.  Should pricing simply be reduced by the NPV of lower cash flows over the next couple months (a miniscule change in pricing)?  Or do long term assumption about growth, rents, occupancy, leasing velocity, and bad debts have to be altered, resulting in larger pricing declines?  And how do you price private real estate transactions when many publicly-traded REITs are showing a decline in enterprise value of 10-30%?

The result of the uncertainty is that if owners don’t have to transact, they won’t.  Those that do need to transact, won’t like the cost of capital.  But at least there is plenty of capital today, unlike the GFC.  Let’s hope our physical distancing works (and everyone participates), quickly driving this virus into submission.  Stay healthy and sane!

TERRI HAYMAKER
Senior Vice President of Real Estate Solutions | IFF

COVID-19: Impact to Nonprofits
Nonprofits achieve their missions through direct and personal connections with people and communities. This public health pandemic has drastically altered the ways nonprofits are able to be in touch with and serve people. To weather this storm, nonprofits are adapting in every way – programmatically, operationally, and through their real estate assets. This plays out differently for different nonprofit sectors – some of whom are experiencing precipitous drops in revenue while others face dramatic spikes in community need.

• Nonprofits experiencing a drop in programs and revenue: Schools, early childhood education centers, community centers, and arts and culture programs offer services based on large groups of people gathering together. Many of these programs have been suspended during pandemic-triggered closures and stay-at-home orders. Schools are transitioning to online classrooms, youth programs are leveraging tools like Zoom, and musicians are selling tickets to livestreamed performances. These transitions – if they are possible at all – are happening with urgency and are therefore messy. They require a degree of technical infrastructure which most organizations and their communities don’t have.
• Nonprofits experiencing a spike in demand for services: Health care centers, food pantries, and homeless shelters are in greater demand and have witnessed a dramatic and unprecedented spike in visits – sometimes double or triple the volume from the previous week. The leaders and staffs of these facilities must think creatively about not only how to serve huge numbers of people – but also how to do so while under the greatest public health threat of our time. They are instituting new health and safety procedures affecting and adapting the typical use of their facilities.

The impact of the pandemic on nonprofit organizations is immediate.  Nevertheless, the solutions to those challenges, as well as opportunities, might well be long-term. Nimbleness, collaboration, and well-managed assets will all be key to the long-term sustainability of nonprofits. Consider these three tools that nonprofits can leverage:

• In these first two weeks of our drastically changed society, one of the most prevalent and inspirational examples of collaboration is the rapid response led by organizations who support nonprofits – including CDFIs, philanthropic institutions, technical assistance providers, and governmental entities. One example of the many strategic partnerships and support systems being created or modified to address nonprofit needs in this unique moment is the Chicago Community COVID-19 Response Fund, which was created through a partnership of the City of Chicago, Chicago Community Trust, and United Way of Metro Chicago. There are many others recently formed or underway using the same approach.
• Flexibility/Adaptability. Nonprofits’ ability to react quickly and innovatively to provide new services is an approach long practiced in the nonprofit world. This current social distancing environment is nothing we have ever experienced before. Nonprofits will have to use their resiliency and adaptability in unique ways in order to deliver services, secure funding and access to capital, and reposition their real estate assets to be flexible and to support their sustainability.
• Real Estate Assets. Facilities don’t just provide space to deliver programs and services. They also serve as assets that can support the financial growth and stability of an organization. What’s more, they often serve as a catalyst for further economic development and a community beacon of hope. Nonprofit real estate will play a key role in the future resiliency and stability of the whole sector.

Opportunities.   For nonprofits, opportunities exist through these questions: How can facilities be used differently based on changes in programs? How can nonprofits use their real estate to enhance their stability and growth? The answers will be different for each organization and will unfold over the upcoming months and years.

The world is changing, and nonprofits must and will change along with it. As nonprofits navigate this unprecedented uncertainty, they will have to rely on both the nimbleness of their programs and operations, as well as new forms of support from government, philanthropy, and financial institutions.  One thing that is clear: we are all in this moment together as a community and only through togetherness will we emerge from this crisis.

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

What do we know now that we didn’t know a week ago? Most important, we know that members of Congress can pull together when it really counts. The $2+ trillion in stimulus – almost 10% of US GDP – is a statement. Its very size, exceeding the stimulus put out during the Global Financial Crisis, offers recognition that an investment today can prevent tragedy tomorrow. We also know that the Fed is capable of moving beyond its playbook of 2008-09 to ensure liquidity. How effective public policy is during this crisis will determine how long this recession lasts and the trajectory of the recovery.

On the capital market side, we have watched debt and equity investors back away from deals, a logical move given a lack of transparency in how rent rolls will hold up across property types. April 1, normally a day for goofy humor, will represent a first test of how tenants and borrowers will behave. Most building owners will try to bridge to tomorrow, to figure out how to help tenants stay in place, be they households or businesses. Prior recessions have taught us to prize occupancy in moments of uncertainty. Investors for whom this isn’t their first recession are preparing for the buying opportunities an economic contraction will create. While it’s too early to see evidence of mispricing of risk, investors are starting to predict where investor sentiment will get too bearish.

Finally, those of us used to the camaraderie of our office mates are learning ways to get it at home. Zoom has provided a means for virtual happy hours and the pleasure of seeing what people wear, what drink they elect to bring, and what background they select. For those fortunate enough to be sheltering with family members, we’re finding our preferred spots for heads-down work, for conference calls and for e-mail slaying. My husband and I – opposites in virtually everything – do a dance midday as I head from the east side of the house and the morning sun to the west side and the afternoon light, while he makes the reverse trip. Amen to that. Best wishes to you all; here’s to a joyous reunion on a sunny rooftop some day soon.

MOLLY McSHANE
Chief Operating Officer | The McShane Companies

The current environment continues to affect our businesses in rapidly evolving ways. Most municipalities have deemed construction an essential activity and, as such, the majority of our jobsites are pushing forward. However, in some parts of the country, it is unclear if all construction projects qualify as essential activities, or in a couple cases there are conflicting directives from cities, counties and states. Another challenge we see on several jobs is reduced crew sizes, which causes decreased productivity and could result in schedule delays. As can be expected, many new safety practices are being implemented on jobsites, including controlled access zones to enforce mandatory distancing and no-contact thermometers to ensure that anyone with a fever is made aware and sent home. Additionally, to prevent delays while maintaining social distancing, a few municipalities have begun to implement virtual inspections. We have a unique opportunity in the construction industry to lead the way in finding safe ways to keep our economy alive and people working, so we will continue to advocate for safe working environments and continued progress for our clients.

As I said last week, developments are not all impacted in the same way.  Some projects in earlier planning stages have been put on a temporary hold, as uncommitted construction debt will be difficult to access in the coming weeks—or even months. For capitalized projects that are seeking entitlement approvals or that are in mid-construction, schedule delays continue to be the most common short-term consequence. In the long term, the effects are likely to vary by product type. A few prominent examples of this are decreased demand for new hospitality developments and increased demand for more affordable housing. In the industrial landscape, leasing is still ongoing but expected to continue at a slow pace in the coming months. Additionally, we are seeing fewer developers take their stabilized or mature product out to market, preferring to let the peak of the crisis pass before exiting their investments. We are also expecting a smaller pool of buyers in the short to medium term. However, there will likely be a long-term increase in demand from e-commerce businesses, as well as warehousing as current inventory levels for many products have proven to be insufficient. We are also anticipating that more companies will focus on diversifying their supply chains, which could bode well for both domestic manufacturing as well as secondary ports.

JON TALTY
Chairman & CEO | OKW Architects, LLC

After another week of coming to grips with our new reality, it is imperative that we think about how this global pandemic will change facets of our industry in both near and long term. After we’ve tackled how to improve the healthcare industry and improve how we serve our communities in times of crisis, we will move to a crucial sector in constant evolution: the workplace.

Social distancing has produced a new environment that millions of Americans must navigate daily. Professionals like myself who didn’t grow up with remote work or expect to implement it in our lives, are now finding it to be not only necessary but effective and relatively fluid. Technology has blessed us with the ability to connect in ways I never would have dreamt a decade ago. As we spend more time apart in the weeks ahead, we will improve our habits and continue with our dogged commitment to our passions and craft. After all, the show must go on. However, once the dust settles, we will all return to our places of work with the reassurance that this paradigm is not only possible, it is useful and even enjoyable.

We will remember this attitude when we approach our next lease negotiation. Whether that happens next year or in the next decade, business owners will know that they are far more flexible than they were the last time they considered their space and technology needs. The once-novel strategy of “hoteling,” implemented by a number of larger service and consulting industries, had left many smaller businesses scratching their heads, assuming that they weren’t able to implement them because of their size, industry, or culture.

We all know better now.

Social distancing is already accelerating the expectations that millions of Americans have of their employers. When we couple this rapid change with business owners’ duty to maximize their real estate, we will see the workplace become far more flexible than it was prior to the pandemic. We will rethink the desk, the workstation, and the office to better suit the employee. Remote work will be far more commonplace now that it has been tested and proven effective on a global scale. Productivity will rise and costs will go down, but more importantly, employees will be armed with the sophisticated tools in their homes so they can be better equipped for their roles as moms, dads, partners, and caretakers. The very notion of going to the office will take on a completely new meaning.

In the long term, building footprints will reflect this new paradigm. For business owners, it will translate to more money falling to the bottom line, more resources to invest in people and technologies, more nuanced real estate to meet the needs of the company, and a happier workforce. This is not to say that remote work will be the default expectation. We need one another, especially in collaborative industries where there’s no substitute for in-person creative exploration and feedback.

But the very idea of what it means to work will be forever changed.

Opportunity
In the reinvention of the workplace, the design profession has always led the charge. Together with landlords and brokers, we need to collectively imagine what our offices will need in the years ahead. As the world shifts away from looking at work as furniture and towards work as a philosophy, we will reevaluate where that work will take place. We will still ask ourselves how much space we need, but there will be a greater focus on what makes us effective and fulfilled. In addition to providing a desk at the office, employers will plan ahead so that their staff can have the same connectivity at home, as some companies are doing now.

Covid-19 has made us reconsider most, but not all habits of the past. With the lessons learned from this pandemic, we will emerge smarter and more flexible to better take on the global marketplace.

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