Commercial real estate deals are still getting done today, even as the COVID-19 pandemic continues to shutter businesses, scuttle in-person meetings and send unemployment skyrocketing. It’s just that closing these deals comes with new challenges.
An example? In late March, as the country was being thrown into the midst of the pandemic, Berkadia closed the $8.75 million sale of Village Woods, a 96-unit garden-style multifamily property in Milan, a community in the Quad Cities area of Illinois and Iowa. Milan is on the Illinois side of the Quad Cities area.
Berkadia managing director Ralph DePasquale, director Parker Stewart and senior managing director Alex Blagojevich of the Mid Markets Group led the transaction on behalf of the seller, Minnesota-based Dominium Inc.
How did this deal manage to reach the finish line? Those involved said it took creativity from everyone involved.
“That was an interesting closing because things were evolving quite a bit over the course of that period of time,” DePasquale said. “Normally, things are almost on auto pilot when you get to that part of the deal. That wasn’t the case here.”
As an example? DePasquale said that buyers and sellers take for granted that you can do a full-unit walkthrough of a property’s units. That, of course, is no longer the case in the age of COVID-19. Fortunately, in this deal the walkthroughs had already happened before COVID-19 made them temporarily a thing of the past.
But Berkadia did have to worry about lender inspections. How would they happen? DePasquale wondered if the title company was even going to be open for the closing.
“It was all about those little nuances that we usually take for granted,” DePasquale said. “How do we do this now in today’s world?”
Fortunately, Village Woods was an attractive property in a strong Midwest location. This provided an incentive for the buyer to push forward with the deal.
DePasquale said that the entire apartment complex had been renovated recently. This included the addition of granite countertops and new appliances. And for a property with just 96 units, Village Woods boasts a strong amenities package, including a clubhouse, pool, 24/7 fitness room and in-unit washers and dryers.
“The buyer that ended up purchasing it had other holdings in the area and felt this would be a good fit for the rest of its portfolio,” DePasquale said.
This sale also highlights how different commercial sectors have been impacted in different ways by the pandemic and shutdown. Multifamily and industrial are holding strong, while retail, office, hospitality and healthcare assets have been hit harder.
Berkadia’s Stewart, who also worked on the Village Woods sale, said that multifamily has remained a solid property type during the first two months of stay-at-home orders. He said that Berkadia surveyed hundreds of apartment owners and found that about 95 percent of their tenants paid their rents in April. Stewart said that the collection numbers for May so far are just as strong.
“The owners we have communicated with have expressed that they are optimistic and happy with where collections are,” Stewart said.
This doesn’t mean that the multifamily sector doesn’t face challenges. Stewart said that owners are concerned about what rent collections will look like in September, October and beyond, after renters have spent their government stimulus money and their higher unemployment payments are set to expire.
DePasquale said that the multifamily sector so far has benefitted, too, from higher tenant retention rates. As DePasquale says, people aren’t looking to move during this pandemic. That has kept renters in their current units.
Why have rent collections been so strong? There’s no easy answer to that.
“The Midwest has a strong work ethic and a strong pay ethic,” DePasquale said. “People pay their bills. If they have the money to do it, they get it done. We haven’t had the ups and downs, either, that some of our brethren have reported on the coasts and in some other areas of the country. Markets here are still fairly strong. We haven’t seen quite the same amount of job losses as they’ve seen in other parts of the country.”
Berkadia is still doing business during the pandemic, too, with Berkadia’s Mid Markets Group having closed eight transactions since the start of April and the writing of this story. Stewart said that multiple transactions are scheduled to close in the short-term, too.
“There is more caution in the market, but there is still capital out there,” Stewart said. “We have found a way to make numerous deals at this point. We haven’t made as many as we would have pre-COVID. But we are still open for business, and we are cautiously optimistic.”
DePasquale said that he is optimistic, too. He and his fellow CRE professionals are working hard to adjust to how COVID has shifted the way business is done, he said.
The big changes? Buyers can no longer tour properties in person. Berkadia brokers can no longer meet investors at these properties. Much more of the business is being done through phone calls and video conferences.
Berkadia now offers virtual tours on selected properties with 360-degree robots that directors can move around a property. This allows them to walk investors through a property’s features while talking to them on the phone and steering those robots through the buildings.
“This is an interesting time,” DePasquale said. “I’ve been doing this for 30-some years. I don’t think we would have been able to conduct the business we are conducting now if this happened even 10 years ago. We have the technology today that can help us conduct business. I can’t imagine doing this work solely with phones and fax machines. That is a bright spot: We have the technology to help us through this.”