Dennis Bernard, founder and president of Bernard Financial Group, has worked in the Detroit commercial real estate industry for decades and, like other CRE professionals here, has been thrilled with the city’s recent resurgence. But like others working through the COVID-19 pandemic, he wonders what impact coronavirus and the resulting shutdowns will have on the city’s momentum, especially in downtown Detroit.
Midwest Real Estate News recently spoke with Bernard, who, in normal times, is based in Bernard Financial Group’s Southfield, Michigan, office. Here is what he had to say about the strength of Detroit’s commercial real estate resurgence and the impact of COVID-19.
Commercial real estate activity was definitely on the rise in downtown Detroit before the COVID-19 pandemic hit. Are you worried that this pandemic will break the momentum that the city had been seeing?
Dennis Bernard: I can answer that simply: “Who the heck knows?” That is my quote. It’s true. At this point, no one really knows.
We need to take a step back. Everyone is asking how bad or how good things are going to be. We have only been at this for 10 weeks, two-and-a-half months. That’s it. And we are just starting to open the state back up. It’s been the same throughout the country. Even states that were opening up earlier, have only been starting to slowly open up again during the last two to three weeks.
Again, no one really knows what is going to happen.
Do you think the strength that the Detroit CRE market showed before the pandemic will help the city and region get through these tough times?
Bernard: We did have all this great momentum in downtown Detroit in office and retail before things started shutting down. How do you weigh the pent-up demand versus the new normal of ‘I don’t want to be in a crowded office or retail establishment?’ No one really knows the answer to that question yet. We are all guessing.
The good news is that we do have a lot of good underlying fundamentals with our region’s economy right now. Southeastern Michigan had never in the past been in such good fundamental shape, both with its economy and commercial real estate market, before going into a recession. Now we are going into a recession, or at least a slowdown, but the region has never been in such good shape entering one. So that can give us hope.
Those strong fundamentals should be a help this time around, then?
Bernard: When we do come out of this, I don’t think anyone is expecting a V-shaped recovery. I think we’re looking at a slower U-shaped recovery. If we get that, I think we’ll be OK. It will take time, and we will have to feel our way through this, but I think our underlying fundamentals will definitely help.
We have had several downturns in Southeastern Michigan over the years in which we were not in good shape heading into them. Now we are. Our industrial market is strong. Our multifamily market has held up well. Outside of hospitality and big box, we are seeing very few loan modifications being requested.
Do you think the economic troubles we are seeing now are different from the ones we saw back in 2008 and 2009?
Bernard: Back in 2008 and 2009, that was a financial recession. The money was gone. Liquidity was gone. Lenders were gone. Today, lenders still have a tremendous amount of liquidity they need to get out there. They have money they need to place. Our financial system has never been in better shape for a recession. There is money to lend and money is cheap. Underwriting will probably be more conservative. Loans might have short-term modifications or reserves built in just in case we have a second wave of this virus. But our lenders are in good shape. Most of the lenders are back in the market in Southeastern Michigan.
But we do have to be honest with ourselves: In the short term we are going to see some pressure on cap rates to go up and values to go momentarily down from where they were 10 weeks ago. That’s because there is uncertainty. But again, that could be a short-term thing as the nation recovers.
How is the Southeastern Michigan market faring in the middle of this pandemic, all things considered?
Bernard: Industrial is doing very well still. And retail, depending on the type of retail, isn’t doing all bad. Grocery-anchored retail is doing just fine. Big boxes have issues. Malls have issues. That is happening across the country. But the office market is holding on. Both office rent collections and occupancies have continued to perform at a surprisingly high level.
Working from home has been interesting. There is a Yin and Yang here. Companies were crushing more people into their office space before the pandemic. Now we’ve found that you can work from home effectively. But part of that efficiency might have been because people had no alternative but to work from home because of the stay-at-home orders. What happens to efficiency when people have other things they can do? They can go to the beach or store. They can play golf or go shopping. What happens to all that productivity when they can do whatever they want? That will be an interesting thing to see play out.
But, as I said at the beginning, it’s only been 10 weeks. Who knows what happens next?
