COMMERCIAL REAL ESTATE

CONNECT THE DOTS

MARKET INSIGHTS WITH DAN DEL REAL

7 Things to Know the Real Estate Market & How to Respond

September 3, 2020

There've been many times in my life where I wasn't sure what was going to happen next. One morning last month I was grabbing a coffee at Starbucks and noticed ash was falling from the sky, the sun was red and the sky was filled with smoke.

There's a global pandemic, protests and riots across America and California is literally on fire. There were Fire Tornados. Fire Tornados. Was this the end of the world?

The problem is it feels like the end of the world. To say 2020 is filled with challenges is an understatement. And it feels like all the challenges are happening all at the same time. You can hear something on the news, jump on social media or talk to someone you know and quickly feel overwhelmed or upset.

With all the craziness going on this year, how do you make sense of the commercial real estate market?

Period of Material Change

A great way to understand what's happening and avoid getting stuck is to get well informed. Getting informed will help you get your bearings and is the first step in formulating a plan of action so you can move forward with confidence.

KC Conway, CCIM Chief Economist, describes the current market as a period of material change. Things are changing rapidly, the market is adjusting and the path forward isn't exactly clear. But there are market trends and indicators that can help us connect the dots.

Read below to better understand what's happening and how to respond.

7 Things to Know About Real Estate & How to Respond

1. There's a Housing Shortage

The housing market shortage continues across the United States. Inventory in the City of Merced is at an all time low with only 87 homes available for sale (down from historical high of 935 in May 2008). Although interest rates have started to creep up slightly, the cost to borrow remains historically low and demand is strong.

When a home is listed for sale it's common to see bidding wars happen between buyers with five to ten offers and a sale above asking price within a week.

If you're in the market to buy you need to be prequalified and ready to move quickly with an offer so you don't miss out.

2. The Eviction Moratorium

On September 1, 2020, the Trump Administration ordered a halt on evictions nationwide to all people who have lost work during the pandemic or don't have other good housing options.

This is great news for people renting who would otherwise be facing eviction without the Government intervention.

3. Loan Forbearance Period Ends

The Government mandate on Loan Forbearance ended in August. The prementioned eviction moratorium may not be great news if you're a property owner with no property income from your Tenant.

The ending of the loan forbearance mandate means banks are now bracing for a potential wave of foreclosures from borrowers who are unable to make loan payments due to loss of rental income because of Covid.

4. What Credit Metrics Mean

Real Estate is nuanced and property types are being impacted differently. Some property types have greater distress than others.

The chart above from Trepp Research shows Commercial mortgage backed securities (CMBS) loans in Special Servicing (LTSS) and Loan Delinquency rates over the past year.

When a borrower can't make payments on their loan they first speak with Special Servicing to explore a solution before moving the loan to delinquent status.

The Retail and Hotel (Lodging) sectors have been impacted dramatically are under the most stress by Covid. Many Municipalities still have restrictions in place on food and beverage, salons and lodging businesses which has impacted their ability to earn money and pay their rent or mortgage.

In order to move the delinquent loans off their books, some banks may be forced to take action through foreclosures which could potentially impact future property values.

5. Covid Impact on State Budget

In the United States, sales taxes are the second largest source of state and local tax revenue, accounting for 23.6% of total U.S. state and local tax collections. In California, sales tax revenue accounts for approximately 20% of total State and Local Tax collection in California.

So what happens to the State Budget when you shut down California and keep business closed for an extended period of time?

One thing that happens is the State sees a massive loss in sales tax revenue. If you're a property owner, the revenue from the State of California is going to be very important going forward.

By the way, can you guess the largest source of revenue?

6. Upcoming Assault on Property Taxes

Only real estate taxes provide the State a greater source of revenue than sales taxes. Everything has a cost associated with it. The real estate industry is going to face a major assault on taxation to help close the delta in sales tax revenue.

The 1031 Exchange, transfer taxes or the homestead exemption tax may all be up for revue when the State of California and Local Governments looks for ways to replace the lost revenue from sales taxes due to Covid.

7. Covid Case Outbreak

According to the John Hopkins University of Medicine, there have been 25,835,301 cases reported globally with 6,092,175 coming from the United States.

California has 11,470,696 people who have been tested, 715,617 confirmed cases and 13,150 deaths.

Merced County has 8,032 confirmed cases and 117 deaths.

Currently the United States is ranked #1 in world for cases by County and California is ranked #1 in cases by State.

It's important to be aware of these numbers because they directly impact occupation restrictions on Commercial Real Estate. You can expect occupancy restrictions to tighten and loosen as the numbers rise and fall.

3 Ways to Respond

You may not have control over the first seven items on the list but you do have control over the last three. Let's explore 3 things you can do to respond to what's happening now.

1. Communicate

If you own an asset that's distressed don't hesitate to talk with your bank and your tenants to see what you can work out.

Is it possible to make payment arrangements with your bank or tenants? Can you restructure your lease agreements? What win/win deals can be made?

You can never over communicate in this type of scenario.

2. Be Proactive

If you see warning signs on the dash board the worst thing you could do is fall asleep at the wheel (I couldn't resist two car analogies in the same sentence).

Now is the time to act. Don't put off dealing with a problem because it's only going to fester and get worse. The longer you wait to deal with the problem the less options you may have.

If talking with your bank or tenant doesn't work out then you may want to explore and selling your property to get ahead of any potential foreclosures on the horizon.

3. Look for Opportunities

Whenever there's change there's opportunity. Expect the current market conditions to present buying opportunities as we work through the global pandemic and pass through a period of material change.

4. Have a Plan

We're in a period of material change so expect more uncertainty as we work through the market correction caused by Covid. Expect challenges to continue as everyone tries to figure things out.

Find clarity to know where you want to go, how to get there and create a plan to move forward with confidence.

The old adage rings true. If you fail to plan you plan to fail.

About The Author

Dan Del Real is a Commercial Real Estate Advisor in Merced, California. When he's not serving his clients, he geeks out on creating videos, spending time with his family and inviting friends over for amazing food and UFC fights.