Commercial real estate brokers, lenders and developers in Des Moines are facing the same challenges that other CRE pros are facing across the country: How do you conduct business when the world is dealing with COVID-19, business shutdowns and a record wave of unemployment?
That was the topic of REjournals’ latest webinar in its Breaking Through the Disruption Series, Des Moines CRE and COVID-19: Strategies for a Shifting World.
Jared Husmann, president of the Katalyst Team at KW Commercial; Paul Rupprecht, president of R&R Real Estate Advisors of R&R Real Realty Group; Jenny Cooper, vice president and manager with Bankers Trust; Kevin Crowley, chief operating officer and manager with NAI Iowa Realty Commercial; and Richard Hurd, founder and president of Hurd Real Estate, shared their insights into how they are doing business today, the challenges that Des Moines faces as Iowa slowly reopens for business and what the future might hold for commercial real estate here.
The big change right now? CRE pros, like everyone else, are trying to figure out what comes next. They’re also figuring out how to best serve their existing clients.
Husmann said that work has certainly changed for him and his company. CRE pros today need to serve as a resource to their existing clients, helping to guide them through the changing landscape of commercial real estate in the age of COVID-19.
“We’re focusing on helping our clients understand what is going on right now,” Husmann said.
Rupprecht echoed that theme.
“We try to gather as much information day-to-day as we can,” he said. “We are spending a lot of time reaching out to our current customers, partnering with them to work through any issues they might have.”
For Cooper at Bankers Trust, doing business while the country battles a pandemic has been challenging. But business hasn’t stopped at her bank. Cooper said that Bankers Trust closed a loan the day before the May 8 webinar. The bank has closed other loans recently, too, even in this challenging commercial environment.
“It’s a little bit of being back to business as usual,” Cooper said.
Crowley said that the start of most of his days are now filled with conference calls and Zoom meetings. He does still go into the office, usually spending about six hours a day there. Most of the agents with NAI Iowa Realty Commercial are still working from home, Crowley said.
And while business has changed, Crowley expressed optimism that the commercial real estate industry will get through this pandemic.
“We’ve found that the federal government throwing money at the banking system this time around is having a positive impact, versus the way things were handled during the downturn of 2008,” Crowley said. “We are still doing business and doing deals. We had a closing last week and this week, and we have some big ones coming up the rest of the month.”
The good news, then, is that CRE companies are still closing deals. The question, though, is how difficult is it to do this during days of social distancing and stay-at-home orders?
Cooper said that technology has helped make closings an easier process, even when the parties to a deal can’t meet in person.
“With technology and the ability to work remotely with title companies and borrowers, and even to get credit approval, we have been able to pivot quickly so that we can continue our daily business,” Cooper said. “I wish we could electronically sign everything, but with real estate transactions we do have to shift to paper sometimes. But the deals we’ve closed so far during this time have gone off without a hitch.”
Crowley said that NAI Iowa Realty Commercial has created its own drive-through closing process. Clients drive to the company’s office door. Team members wearing gloves and masks present these clients with a clipboard of papers they need to sign. The pages that need signatures are marked with red tabs.
“It’s been successful for us,” Crowley said. “Drive-through closings have been a homerun.”
But what about appraisal values? Have falling property values scuttled deals? Not surprisingly, the answer to that question depends on the type of commercial property being evaluated.
Cooper said that Bankers Trust has been focusing mainly on industrial deals. Those deals have not seen big fluctuations in valuations as that sector of the commercial real estate industry is still performing well.
“If we were looking at a retail deal today, it might be a different story,” Cooper said. “A lot of the appraisals, though, were completed in mid- to early April. As times change, there will be adjustments.”
Webinar participants also discussed the fortunes of various commercial sectors. They agreed that significant changes will be coming to the office market as companies figure out how to bring their employees back to work safely.
Other employers might make the shift to a workforce that spends more time working from home offices.
Rupprecht said that the owners of office buildings in the Des Moines area might have to make significant changes to their properties before their tenants feel comfortable returning.
“People want to feel safe. That is expected,” Rupprecht said. “It will be about providing a safe environment in the office setting. It’s going to be about healthy buildings, cleaning and disinfecting.”
Rupprecht said that touchless technology will be important. Employees and companies will want touchless bathroom faucets that turn on when they stand in front of them. They’ll want doors that open automatically.
Air quality will matter, too, Rupprecht said, with owners working on ways to bring in and circulate fresh air through their properties.
Then there is the matter of social distancing. Building owners and tenants will have to figure out how to keep enough distance between employees.
“It could mean a change in how workstations are set up,” Rupprecht said. “Companies might have to stagger cubicles. Companies might put in phone apps that track employee movements to make sure they are practicing social distancing.”
Crowley said that he’s already seeing office clients adjusting to what might become the new normal. One had recently built new office space. That company has decided to move a third of its workforce into the new space, giving these workers enough space for safe distancing. The company is also keeping a temporary space, with a third of its workforce reporting there. The final third of its workers will work from home.
Hurd, from Hurd Real estate, tackled the tough question of what the future might look like for retail real estate. He said that this sector certainly faces challenges because of forced shutdowns and now skittish customers.
But he also expressed optimism that retailers will adapt and survive.
“Retail will survive, but it will be different from what we have known as traditional retail,” Hurd said. “There is still a place for physical retail.”
What changes does Hurd predict for retail? He pointed to the increase in curbside pickup and home delivery from restaurants and other retailers. That, he said, will continue after the pandemic eases. He also predicted an increase in retailers opening stores with smaller physical footprints.
Retailers will offer fewer products in these stores, which will act more as showcases for the products offered on the stores’ ecommerce sites. Customers will do most of their buying on these sites.
“Retail as a class will survive,” Hurd said. “It’s just a matter of rightsizing the product to the marketplace. That will be the next phase of retail.”
As states slowly reopen their economy, more retailers across the country are opening their doors again, although in varying forms. But will customers feel safe to return to retailers even as cases of COVID-19 infections and deaths continue to rise?
Husmann said that people will return to the stores. But it’s unclear how they will return and in what numbers.
“Retail has been changing for 20 years,” Husmann said. “It will continue to change. This is just accelerating what is already happening in the retail market. We have had to adapt in a matter of eight weeks, though, instead of over several years.”
Husmann said that funds from the CARES Act relief package have been blunting some of the damage to retailers and other businesses. The big question is what happens after this support from the government comes to an end?
“What happens once we push through this?” Husmann asked. “Real estate is still a laggard of most of the rest of the economy. It will be interesting to see where real estate values are in the fall.”
Another challenge that building owners face? When can they safely reopen their onsite amenities, their fitness centers, community rooms and pool areas?
Rupprecht said that building owners will have to make these decisions on their own, determining when it is safe to allow tenants to use these common-area spaces. And when the spaces do open, they most likely won’t operate as they did before the pandemic. Occupancy levels, for instance, will have to be lowered and enforced.
“There are going to be changes,” Rupprecht said. “It’s going to be about communicating with customers. What do they want? Building owners will have to adjust the use of those amenities to meet the requirements of their customers.”
Then there is the question of rent payments, especially in the multifamily space. Both Rupprecht and Husmann said rent collections overall have been stronger than expected during this challenge. The big question, though, is how long this will continue if the economy doesn’t rebound quickly enough.
Cooper said that multifamily owners might face more challenges once the extra unemployment payments that the government has approved run out. If no other form of rental assistance is approved, will a greater number of renters stop making their monthly payments?
“When will multifamily rents take a hit?” Cooper asked. “If unemployment stays as high as it is, what will happen to multifamily rent collections?”
Husmann agreed. He said that there will be layoffs and furloughs in the future, even as the country begins reopening from its shutdowns. This might not only cause more renters to miss payments, it might force many to stop renting altogether. They might move back in with their parents or other family members if they no longer have the income to cover their monthly rents.
“I think where we’ll see multifamily take some hits on vacancy will be in the fall,” Husmann said.
The Paycheck Protection Program, which provides loans to small businesses partly so that these companies can keep people employed, has been a hot topic throughout the pandemic. Business owners must meet certain rules, mostly centered around keeping workers on the payroll, to have these loans partly or completely forgiven.
The financial support from this program, even with its missteps, has provided a bit of a boost to small businesses. But this support is only temporary. What happens in the future for small businesses?
“The PPP has been a real plus,” Hurd said. “The question, though, is what happens in July, August and September when this support is all burned off. Our collections so far have been quite good. I’m hesitant to say they will remain that way. The cost to gear back up for these retailers and restaurants is expensive. We’ll have to see how it all shakes out.”
Not all retailers have been hit equally by the pandemic, of course. Hurd said that grocery stores, convenience stores and pharmacies have all done well during the crisis.
“These have been open and performing,” he said. “They have been the stars of the retail world right now. It is our apparel retailers and others who have been forced to close that are struggling. Those are the retailers to keep an eye on, as well as local restaurant groups. It could be challenging for them going forward.”
Hurd said that different retailers will see different results when it comes to convincing customers to return after they reopen.
“People have to buy food and gas. They need to get medical services,” Hurd said. “That will return quickly. But will people return to the restaurants as quickly as we need them to? People have been buying a lot online during this. They have changed their habits. The multi-channel retailer is the wave of the future. Retailers have to offer that multi-channel approach to survive. There is no question about that.”
Crowley said that the uncertainty surrounding COVID-19 poses a big challenge to the economy and business owners. How can anyone determine when it is truly safe to reopen and return to a life that at least approaches normalcy?
“What if we have a dead-cat bounce on COVID?” Crowley asked. “If COVID comes back hard after we reopen, we then face a lot of issues. We might have to go back to sheltering in place. It’s all about how safely we can return to work and reopen. A lot of our organizations are putting out back-to-work memos. Everyone faces a lot of challenges as this moves forward.”