Also in the works is the next Virtual Property Dealshare event, which will be held at the end of the first quarter. In line with our newly formed ad hoc IRE (Institutional Real Estate) Committee, let us know if you would like to join.

On December 27, 2020, as part of a larger government funding bill, President Donald J. Trump signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”). The Act, among other things, restarts the Paycheck Protection Program (“PPP”), as administered by the Small Business Administration (“SBA”), provides borrowers with greater flexibility in using PPP loan proceeds and expands the types of expenses eligible for loan forgiveness. The following is a summary of these provisions; however, please note that the SBA is required to issue implementing regulations by January 6, 2020 and we expect further guidance on the Act’s provisions at that time.

What is the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act?

In general, the Act appropriates $325 billion to the PPP and other programs, including (a) $284.45 billion committed to providing eligible borrowers with the opportunity to obtain a second round of PPP loan funding (“PPP Second Round”), (b) $20 billion committed for the Economic Injury Disaster Loan (“EIDL”) advance program; (c) $3.5 billion committed for the Section 7(a) debt relief program; (d) $2 billion committed for SBA lending enhancements; and (e) $15 billion committed for grants for shuttered live venues, theaters, museums and zoos.

Existing PPP Loans

Does the Act expand the types of expenses that are eligible for forgiveness?

Yes. While borrowers are still required to spend at least 60% of their PPP loan proceeds on eligible “payroll costs” in order to be eligible for full forgiveness, the Act expands the permissible use of PPP loan proceeds for which borrowers may receive forgiveness to the following:

Additional Group Insurance Expenditures (Payroll Costs) – The Act redefines “payroll costs” to specifically include group insurance payments made on group life, disability, vision and dental insurance.

Covered Supplier Cost Expenditures – Expenditures made (a) to a supplier of goods for goods that are essential to the borrower’s operations at the time the expenditure is made and (b) pursuant to a contract, order or purchase order in effect at any time before the PPP loan is disbursed, provided that for perishable goods such expenditure need not be tied to a contract or purchase order that existed prior to the PPP loan.

Covered Worker Protection Expenditure – Expenditures that are made to facilitate the adaptation of the business activities of a borrower to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, the Occupational Safety and Health Administration or a state or local government, subsequent to March 1, 2020. These expenditures may include the purchase, maintenance or renovation of drive-through windows, air filtration systems, physical barriers (sneeze guards), expanded indoor or outdoor operating space, onsite or offsite health screening and other expenditures as necessary. Expenditures on real estate and other intangible property are not covered under this category.

Covered Operations Expenditure – Expenditures for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.

Covered Property Damage Cost – Expenditures related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.

How does the Act otherwise impact a borrower’s ability to obtain full forgiveness?

Applicable Covered Period – A borrower may elect, at its option, to choose a “covered period” ending at any time between 8-weeks and 24-weeks after loan origination. Regardless of the chosen covered period, each borrower must use the full amount of the PPP loan proceeds on eligible expenses during its chosen covered period to be eligible for full loan forgiveness.

Simplified Forgiveness Process for PPP Loans up to $150,000 – The Act provides for a simplified loan forgiveness process for PPP loans of up to $150,000. Specifically, applicable borrowers will be eligible for loan forgiveness if the borrower signs and submits a one page certification to the lender (a) describing the number of employees the borrower was able to retain because of the PPP loan, the estimated amount spent on eligible payroll costs and total PPP loan value and (b) attesting that it accurately provided the required certification and complied with applicable PPP requirements. The form of the above described certification is expected to be available by January 20, 2021.

Economic Injury Disaster Loans Advances – Borrowers that received both a PPP loan and an EIDL advance will no longer be required to subtract the EIDL advance from their PPP forgiveness calculation.

If a borrower has already received a forgiveness determination from the SBA, may the borrower refile its loan forgiveness application to take advantage of the expanded provisions governing forgivable uses of PPP loan proceeds?

No. The Act provides that its provisions expanding expenses eligible for loan forgiveness will not apply to a borrower that “received forgiveness before the date of enactment” of the Act. Please note that although the Act is not explicit on this point, it appears, based on the foregoing language of the Act, that if a borrower only received a portion of its requested loan forgiveness prior to enactment of the Act, such borrower would not be able to claim the additional covered expenses described above as forgivable expenses. In addition, the Act does not specifically address whether a borrower that has filed its loan forgiveness application and is awaiting a forgiveness determination by the SBA may re-file its application to take advantage of the expanded provisions concerning expenses eligible for loan forgiveness.

PPP Second Round Loans

What borrowers are eligible to obtain a PPP Second Round loan?

In order to be eligible for a PPP Second Round loan, a borrower must be “a business concern, nonprofit organization, housing cooperative, veterans organization, [t]ribal business concern, eligible self-employed individual, sole proprietor, independent contractor, or small agricultural cooperative” and be able to demonstrate the following:

·        it has no more than 300 employees; and

·        it has suffered a 25% or more reduction in gross revenues between comparable quarters in 2019 and 2020.

A borrower may either be a first time PPP borrower or have previously received a PPP loan. Importantly, on the Act’s face, it is unclear whether a borrower may avail itself of (a) the SBA’s alternative employee-based and revenue-based size standards corresponding to a borrower’s primary industry (i.e., the NAICS industry classification) or (b) the SBA’s alternative maximum tangible net worth and net income standards for purposes of determining its eligibility under the PPP Second Round.

Does the Act expand PPP Second Round loan eligibility to certain entity types?

Yes. New entities that are eligible to participate in the PPP Second Round include certain Section 501(c)(6) nonprofits, including trade organizations and chambers of commerce, and nonprofits and government instrumentalities that engage in destination or tourism marketing (defined as “destination marketing organizations”) with (a) 300 or fewer employees, (b) that do not receive more than 15% of their revenue from lobbying (capped at $1 million during the most recent tax year prior to February 15, 2020) and, (c) if engaged in lobbying activities, that do not engage in lobbying activities which comprise 15% or more of total business activities. In addition, certain local newspapers, television, and radio stations, which were largely ineligible to participate in the first round of the PPP by their affiliation with other stations, are also eligible to participate.

Are certain entity types ineligible to participate in the PPP Second Round?

Yes. The Act renders the below types of persons and entities ineligible to participate in the PPP Second Round.

Those entity types that are generally prohibited from participating in the SBA’s 7(a) lending programs listed at 13 C.F.R. 120.110, which includes, among other things, financial businesses primarily engaged in lending:

Publicly traded companies, provided that businesses that are owned or controlled by publicly traded companies may still be eligible.

·        Any business primarily engaged in political or lobbying activities;

·        Any business (a) organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong or (b) that has a person who is a resident of the People’s Republic of China on its board of directors; and

·        Any person required to register as a foreign agent under the Foreign Agents Registration Act of 1938.

Is a borrower that returned all or part of its first round PPP loan eligible to reapply for a PPP Second Round loan?

Yes. The Act provides that a borrower that returned all or part of its first round PPP loan may reapply for the maximum amount applicable under the Act.

Is a borrower that is in bankruptcy eligible for a PPP Second Round loan?

Yes, under certain circumstances. Pursuant to the Act, a procedure is established for certain bankruptcies, including Chapter 11 bankruptcies, whereby a debtor in possession, or a trustee of a debtor, may request the Bankruptcy Court’s permission to obtain a PPP Second Round loan. The PPP Second Round loan will be “treated as a debt to the extent the loan is not forgiven” and will have super-priority equal to “administrative expenses.”

Are borrowers still required to apply the affiliation rules in determining whether the borrower is eligible to participate in the PPP Second Round?

Yes. The Act explicitly provides that the affiliation rules are applicable. However, the Act maintains existing expansions in eligibility for businesses assigned a North American Industry Classification System (“NAICS”) Code 72 (Accommodation and Food Services).

What is the maximum loan amount a borrower is eligible for under the PPP Second Round?

Under the PPP Second Round, a borrower will be eligible to obtain a loan amount equal to the lesser of (a) 2.5x its average monthly payroll costs, as measured during either (i) the one-year period before the date the PPP Second Round loan is disbursed or (ii) calendar year 2019, or (b) $2 million. In addition, for a borrower assigned a NAICS Code of 72 (Accommodation and Food Services), the borrower will be eligible to receive a PPP Second Round loan in an amount equal to the lesser of (a) 3.5x its average monthly payroll costs or (b) $2 million.

Lender Provisions – Existing PPP Loans and PPP Second Round Loans

Did the Act set aside a portion of the appropriated funds for specific types of financial institutions?

Yes. Of the approximately $284.5 billion appropriated to the PPP Second Round, (a) $15 billion will be allocated for guaranteeing PPP loans made by community banks and credit unions with less than $10 billion in consolidated assets, and (b) $15 billion will be allocated for guaranteeing loans made by community development financial institutions and minority depository institutions.

Does the Act provide for greater protections for PPP lenders?

Yes. The Act provides that the SBA will hold a PPP lender harmless, provided it has acted in good faith and adhered to federal, state and local laws. These provisions are summarized below.

Reliance – PPP lenders may rely on certifications and documentation submitted by a borrower, provided that (a) the certification and documentation satisfies the applicable PPP laws and regulations and (b) the borrower attests it has accurately provided the certification or documentation to the lender in accordance with applicable PPP laws and regulations.

No Enforcement Actions – The SBA will not take an enforcement action or assess a penalty against a PPP lender, provided the lender (a) has acted in good faith and (b) complied with applicable federal, state and local requirements.

What PPP lenders are eligible to participate in the PPP Second Round?

All lenders previously approved to originate PPP loans may participate in the PPP Second Round pursuant to existing PPP requirements.

What are the loan processing fees for PPP Second Round loans?

The loan fees that PPP lenders will be entitled to are noted below.

·        $50,000 or less – PPP lenders will be entitled to the lesser of either (a) 50% of the PPP loan amount disbursed or (b) $2,500.

·        More than $50,000, and up to $350,000 – PPP lenders will be entitled to 5% of the PPP loan amount disbursed.

·        More than $350,000 – PPP lenders will be entitled to 3% of the PPP loan amount disbursed.

When are a borrower’s agent fees required to be paid?

It depends. If a borrower has “knowingly retained an agent,” then applicable agent fees will be paid by the borrower and may not be paid out of the PPP loan proceeds. A lender is only required to pay agent fees where the lender has “directly” contracted with the agent.

PPP Audits

Does the Act provide for greater clarity on how the SBA will audit existing PPP loans and PPP Second Round loans?

While the Act itself does not provide for greater clarity, the Act requires the SBA to issue its forgiveness audit plan, policies and procedures to Congress by February 10, 2021. This guidance should provide greater transparency with respect to how and when the SBA will audit PPP loans.

Section 7(a) Loan Programs

How does the Act impact ordinary Section 7(a) business loans?

The Act also provides for certain enhancements to existing Section 7(a) business loans. As a means of ensuring the SBA has adequate tools to address the needs of small businesses during the pandemic, the Act temporarily enhances the terms of the 7(a) loan program by (a) increasing the loan guarantee to 90% until October 1, 2021 and (b) reducing or eliminating borrower and lender fees until September 30, 2021.

Separately, until October 1, 2021, the Act temporarily increases the loan guarantee for Section 7(a) express loans in an amount less than $350,000 to 75%, while keeping the current 50% guarantee for loans larger than $350,000.

Shuttered Venue Operators

What types of venue operators are eligible to receive a grant under the Act?

In general, a business is eligible to receive a grant under the Act if it is a “live venue operator or promoter, theatrical producer, or live performing arts organization operator, a relevant museum operator, a motion picture theatre operator, or a talent representative” that was both (a) fully operational on February 29, 2020 and (b) that demonstrates a 25% reduction from the gross earned revenue during the same quarter in 2019 (or 2020, as applicable). Certain venue operators are not eligible to participate (e.g., venue operators owned by public companies, offering performances of a prurient sexual nature, receiving more than 10% of gross revenue from federal funding).

We note that, as of the date of the grant, the business must be open or intend to reopen.

What is the amount of grants that may be made to a venue operator?

Initial grants may be in an amount equal to 45% of gross earned revenue in 2019. A venue operator may qualify for a second grant equal to 50% of the amount of the first grant, but the total amount of grants may not exceed $10 million.

In what priority will grants be awarded?

For a 14-day period, the SBA will award priority grants to the venue operators that have seen at least a 90% decline in revenue comparing the period between April 1, 2020 and December 31, 2020 against the comparable period in 2019. Immediately thereafter, for another 14-day period, the SBA will then award second priority grants to venue operators that have seen at least a 70% decline in revenue. After both priority grants have been satisfied, all other venue operators may then apply. We note that the Act reserves $3 billion for venue operators that do not qualify under the priority grant provisions.

Is a grant recipient restricted in how it uses the grant funds?

Yes. A recipient must use the grant funds for the following expenses which were incurred between March 1, 2020 and December 31, 2021: payroll costs; and certain rental obligations, utility payments, mortgage obligations, worker protection costs, payments to certain independent contractors and ordinary/necessary expenses.

PPP Tax Considerations

Did the Act render expenses paid with the proceeds of a forgiven PPP loan deductible?

Yes. In a reversal of the Department of Treasury’s and Internal Revenue Service’s prior guidance, the Act provides that no deduction for business expenses funded with the proceeds of a forgiven PPP loan may be denied by reason of the exclusion of the loan forgiveness from gross income.

Did the Act extend payroll tax deferral periods?

Yes. In prior guidance, the Internal Revenue Service permitted employers to defer withholding of the employee’s share of social security payroll taxes from September 1, 2020 through December 31, 2020 and to withhold and deposit the applicable taxes ratably between January 1, 2021 and April 30, 2021. The Act extends the withholding and depositing deadline to December 31, 2021.

Did the Act extend the Employee Retention Tax Credit?

Yes, the Act extends the Employee Retention Tax Credit (“ERTC”) through June 30, 2021. In addition, for calendar quarters beginning after December 31, 2020, the ERTC was expanded by (a) increasing the amount of the tax credit from 50% to 70% of “qualified wages” paid to an employee up to $10,000 per calendar quarter and (b) expanding a business’ eligibility by reducing the threshold for the decline in gross receipts to qualify as an “eligible employer” from 50% to 20%. Further, the Act allows employers that obtained PPP loans to claim the ERTC on eligible wages not used to support PPP loan forgiveness.

Source: National Law Review

With real estate loans coming due and developers scrambling for cash, private credit funds are gearing up for a busy year.

More than $400 billion in commercial and multifamily debt is maturing in 2021, according to Bloomberg. Without fresh capital to survive the pandemic, owners of distressed property face default.

The predicament for owners creates an opportunity for private lenders to buy up loans and offer new

debt.

“In the last 90 days, I’ve had lots of dialogue directly with banks and debt funds in terms of loan sales,” Josh Zegen of Madison Realty Capital told Bloomberg. “We’ve executed on some of it, but I see a lot more going into the first and second quarters of 2021.”

Commercial real estate deals plunged this year as the hotel, office and retail markets struggled to gain momentum following the initial jolt of the pandemic.

Russell Gimelstob, chief executive officer of Los Angeles–based Ascendant Capital Partners, told Bloomberg that offering new debt for distressed properties can bring in returns of between 10 percent and 12 percent.

Buying distressed properties directly could bring higher returns, but those deals are rarer, for now, as lenders work with owners on finding solutions.

That could all change.

“We think equity and real estate trades are going to be more prevalent when the runway ends,” Gimelstob said.

Source: Bloomberg

Churchill Real Estate’s Justin Ehrlich has seen a lot during his time as a developer and lender in New York. He witnessed the collapse of the real estate market during the 2008 financial crisis, followed by the mad rush to build luxury condo towers in some of Manhattan’s swankiest neighborhoods.

But nothing compares to the past nine months, he said. “It’s not normal,” Ehrlich noted. “It’s the worst I’ve ever seen.”

He pointed to an unusual rise in Uniform Commercial Code foreclosures by mezzanine lenders, which he sees as a canary in the coal mine for a mound of distress expected to hit the market in the next year. While judicial foreclosures are still banned under an emergency order by New York Gov. Andrew Cuomo, UCC foreclosures on some high-stakes projects have been moving ahead in recent months since they can bypass state courts.

With one of the roughest years on record coming to a close, many have been waiting for their moment to jump on distressed properties. Now, mezz lenders — which provide junior debt on real estate projects — are increasingly initiating UCC foreclosures on some major developments in need of “rescue funding.”

In August, for example, SL Green Realty filed a UCC foreclosure tied to a high-end retail property on Fifth Avenue owned by Joe Sitt’s Thor Equities. And most recently, CIM Group has been battling it out in court with Ziel Feldman’s HFZ Capital Group to auction off loans tied to several of the developer’s Manhattan condo projects.

Matthew Mannion, who specializes in UCC foreclosures, has conducted at least eight auctions tied to mezz loans or so-called membership interests since March, according to an affidavit filed last month. And Mannion told The Real Deal that more are on the way.

“This is the tip of the iceberg,” he noted.

The uptick in cases presents an opportunity for deep-pocketed lenders like SL Green and CIM that may soon be able to expand their portfolios by taking over projects on the cheap.

Representatives for SL Green and CIM declined to comment.

“Many of the players in the mezz space are not afraid to own the asset,” said Janice Mac Avoy, co-head of Fried Frank’s real estate litigation practice.

Mezzing around

After the last recession, banks pumped the brakes on highly leveraged real estate deals, forcing many developers to look elsewhere for funding. Mezz debt became one of the go-to financing sources to help fill the gaps.

It also has its drawbacks.

Mezz lenders are often among the last to get paid back on a project. So when things go south, their positions can easily get wiped out.

But mezz lenders have a trump card in UCC foreclosures. They are often processed within two to three months, much quicker than traditional foreclosures, which can carry on for years.

By initiating a UCC foreclosure, a mezz lender has a chance to take over a struggling project or sell its stake in the property. In such cases, the junior lender has a huge advantage. It can place a “credit bid” on the property using the existing debt it is owed from the borrower. This allows mezz lenders to acquire assets at a lower cost than if they bought the property outright.

“Mezz lenders are much more aggressive because they are in a riskier position,” said Neil Shapiro, a partner at the law firm Herrick, Feinstein.

Yet UCC mezzanine foreclosures can be trickier than traditional mortgage foreclosures. Rather than being secured by the property, a mezz loan is converted to an equity interest in the business. So if the junior lender succeeds in a foreclose, it becomes the property’s primary owner and must make payments on the senior debt.

But Mac Avoy said banks and other senior lenders are often more apt to work with subordinate lenders — which usually have no prior history of default — than troubled borrowers. “Lenders aren’t thrilled doing business with someone who isn’t able to pay them back,” she noted.

When considering a foreclosure, mezz lenders have to decide if the project is worth more than its debt. If not, the mezz lender can try to sell its loan or work with the borrower on restructuring the loan terms.

“I am seeing the beginning of a lot of lenders saying, ‘We can’t do nothing,’” said Jay Neveloff, a commercial real estate lawyer and partner at New York-based Kramer Levin Naftalis & Frankel.

Lenders are getting especially antsy with borrowers who have been behind on payments for some time.

Such is the case with Mack Real Estate Group, which is seeking to foreclose on the second phase of the Denizen — All Year Management’s luxury apartment complex in Bushwick. Yoel Goldman’s Brooklyn-based firm was unable to close on a $652 million refinancing for the 900-unit rental complex and has halted payments to its bond investors in Israel.

Representatives for All Year and Mack did not respond to requests for comment.

Courtroom drama

In New York’s high-flying real estate market, nothing comes easy.

So as more lenders seek to foreclose on assets, more borrowers are filing lawsuits to stop them.

In one of the most high-profile cases so far, Los Angeles-based developer and lender CIM sought to foreclose on mezz positions on four of HFZ’s Manhattan condo projects.

The day before the planned auction last month, HFZ filed a lawsuit seeking to stop the sale, arguing that it was “commercially unreasonable.” The developer claimed that CIM’s two-month auction notice was indefensible and called the foreclosure effort a “predatory attempt to capitalize on the Covid-19 pandemic.” The judge ruled in HFZ’s favor and halted the auction for the time being.

Wonder Works Construction made similar claims in a lawsuit against New York-based mezz lender Nahla Capital. The lender sought to foreclose Wonder Works’ Upper East Side condo development Vitre, noted for its shiny glass façade. Nahla hired a team of JLL brokers to market the loan back in October.

But a judge denied Wonder Works’ lawsuit, noting that the firm had been in default on its loan payments since January. The auction went ahead this month, and Nahla won a credit bid on the property to essentially become the owner.

Representatives for Wonder Works did not respond to a request for comment.

Generally speaking, Neveloff said, borrowers usually file lawsuits to “buy time” to negotiate on payments. In at least one case, this has proved to be a successful strategy.

In May, Beverly Hills-based Ohana Real Estate Investors sought to foreclose on the five-star Mark Hotel on the Upper East Side and sell the hotel through auction. Alexico Group, the hotel’s owner, filed a lawsuit, which led to a judge delaying the sale for 30 days. That bought Alexico time, and the two parties were eventually able to reach a settlement, which increased the principal and interest rate on the mezz debt, Bloomberg reported.

Ohana and Alexico declined to comment.

The lawsuits can delay a sale, but ultimately a developer has to find money to pay its lenders. If not, Mac Avoy said, it will be similar to what occurred in the last crisis.

“It’s the musical chairs … of different ownership,” she noted

Source: The Real Deal

Coronavirus will not kill the office. If anything, it figures to be more dynamic than ever. The ability to work remotely will not drive most people away from cities and offices, but it will enable many to live and work in new ways and places — while causing its fair share of disruption.

Even before the pandemic, there were signs of trouble with the office market in the handful of cities where the “creative class” had been flocking. In 2018, net migration to New York, Los Angeles and San Francisco was negative, while the U.S. economy grew at a healthy 2.9 percent. Creative magnets like London and Paris were experiencing similar declines.

The explanation for the declines — mostly high housing costs because of severe limits on new construction — obscures other forces that were destabilizing the traditional office market. In the middle of the 2010s, Amazon, Facebook, Google, Apple and others started splitting their headquarters into multiple locations. Stripe, one of the world’s most valuable start-ups, went a step further. In 2019, it “opened” a remote hub, hoping to “tap the 99.74 percent of talented engineers living outside the metro areas of our first four hubs” in San Francisco, Seattle, Dublin and Singapore.

For the fastest-growing companies, being able to tap into talent anywhere became more important than having all their teams in one place. Smaller cities were good enough. In retrospect, this shouldn’t have been a surprise, despite all the talk about the importance of giant, dense labor markets to fuel innovation. After all, Silicon Valley itself is not a city but a cluster of sprawling towns scattered along a highway.

The defining characteristic of this new version of the creative class may not be where it lives, but its ability to live anywhere it wants. Put differently, people move to certain cities in search of better-paying jobs, but it’s now possible to earn high (if not the highest) salaries from almost anywhere. That has been true in certain smaller cities in recent years (Austin and Denver in the United States, for example, and Manchester and Leeds in Britain). To a lesser extent, it has also been true for people who chose not to live in cities at all.

There were more specific signs that the office market was headed for a crisis. While employers were fighting over talent, many employees found traditional offices lacking. In 2019, Leesman, a firm that measures employee experiences, analyzed how the workplace affects employee productivity, pride and enjoyment. Drawing on 719,000 respondents in 4,771 workplaces worldwide, Leesman found that nearly 40 percent of employees felt their workplace did not enable them to work productively.

Then the pandemic forced many employees to reassess their preferences. Multiple surveys have found that many are happy to continue to work remotely and would move, if given the chance. Still, this data tells us little about the post-Covid world. Those who thrived initially might burn out if they stayed home for a more extended period. Those who struggled might do much better once they’ve mastered new tools, once they have access to alternative spaces near home, or once children, housemates and partners are back in school or at work. At the same time, the technologies that allow us to work, learn and socialize remotely will only get better.

Covid-era market data also offers mixed signals. Landlords and brokers are quick to point out that companies like Google and Facebook signed new leases during the pandemic. But these companies hire thousands of new employees every quarter and plan their expansion many quarters or years in advance. Even companies that aren’t in growth mode have yet to make up their mind about the new normal.

Instead, many are renewing their existing leases for a shorter period until market conditions become clearer. Data from JLL, a real estate consultancy, shows that renewals as a share of leasing activity have jumped to 51 percent from 29 percent pre-Covid, and that leases are becoming shorter.

It seems safe to say that total demand for offices will diminish to a moderate degree. The bigger changes will be in how total demand is reshuffled and what office providers will have to do to remain competitive. Most office activity will not move to homes or to the cloud. Instead, it is likely to be redistributed within and between cities, with a variety of new employment areas popping up and saving many people the trouble of simultaneous commuting to a central business district.

At the end of the 19th century, most American urbanites walked to work; as late as 1930, Manhattan’s residential population was larger than it is today, meaning the city was more mixed in terms of land use, not dominated by office towers. It’s not hard to imagine that many will once again prefer to work within walking or biking distance of home.

As a result, buildings in many traditional employment districts will have to compete more fiercely, and a small but significant percentage of office space will most likely have to be repurposed into housing, e-commerce fulfillment centers, delivery-only kitchens, health care centers, meeting spaces, event spaces and other uses.

Residential areas, street retail shops and hotels may have to accommodate more daytime workers. Signs of this shift are already visible. The nation’s largest multifamily operators, Avalon Bay Communities and Equity Residential, have been adding work and meeting spaces to their buildings for a few years now.

Common, the largest co-living operator, is partnering with local governments to develop new types of live/work communities. Hospitality brands like Starbucks, CitizenM and Mandarin Oriental have been experimenting with converting local coffee shops and hotel floors into work spaces that can be booked by the hour or day. And city governments are working to redistribute jobs and services across residential neighborhoods.

Post-Covid for example, a Brooklyn or Queens resident who previously commuted to Manhattan may opt to work several days a week in a shared space within a 10-minute walk from home. Some large employers are already experimenting with satellite offices in the suburbs of cities in which they already have a downtown headquarters. The main office will remain important for most companies, but fewer employees will be expected to be there all day, every day.

The office will become more of a consumer product. And just like every consumer product, the office will have to continually fight for its customers and meet their needs — not only when it’s time to renew the lease. Offices will need spaces for specific tasks like focused work, team brainstorming, client presentations and employee training. And they will need to be more focused on individuals, even if these people work for a large company.

These changes will be gradual, but they will have a significant impact on urban office buildings, which used to be perceived as almost as safe as government bonds. Consider, in comparison, that the “retail apocalypse” that led to multiple bankruptcies and the closing of tens of thousands of stores was a result of less than 12 percent of all activity moving online, over a period of two decades, while total sales were still growing.

Over the next decade, the transformation of the office market figures to be less comprehensive, but it will probably happen faster and to an industry that is far less prepared. And just as in retail, it will create some new winners, as well as a multitude of losers — those unwilling or unable to adjust to an era of worker choice.

Source: Wall St. Journal

Office landlords have fared better than shopping-mall owners during the pandemic so far. However, they may soon be competing with their own tenants as companies sublet space they no longer need.

Asking rents for offices in global hubs like London and New York have been surprisingly stable in 2020, even as many employees continue to work from home. Manhattan rents fell 3% in the third quarter compared with the same period of 2019, while rates for the best locations in the U.K. capital are down by roughly the same amount, Savills data shows.

Scratch the surface though and these markets are becoming tougher for landlords. Few businesses will commit to a new lease until they understand how remote working will change their real estate needs, so competition for tenants is intensifying. Any company that is willing to sign a 10-year lease in central London today can get up to 28 months rent-free, compared with the 24 months on offer before the pandemic.

Landlords’ next challenge will come from tenants that are beginning to unload space they no longer want. Although companies cannot break leases without reputational damage, they are able to sublease all or part of their offices—an option that both Twitter and Airbnb have used recently.

Rents typically begin to fall when this secondhand supply reaches 30% of total office vacancy, according to property experts at Green Street. Sublet offices are offered at a discount, pressuring landlords to slash rents in the primary market. Subleasing activity is already at this 30% threshold in San Francisco, numbers cited by Green Street show, while tenant-controlled space on offer in Austin, Texas, and Seattle is more than double the rate both cities recorded at the peak of the global financial crisis. So-called grey space is approaching one-fifth of vacant supply in Manhattan.

Source: Wall St. Journal

Landlords must extend benefits to tenants to be eligible

Multifamily landlords that are having trouble with mortgage payments are in luck: The Federal Housing Finance Agency has extended forbearance options for loans backed by Fannie Mae and Freddie Mac until Mar. 31.

The measure was originally set to expire on Dec. 31.

Struggling landlords who have federally guaranteed mortgages and want to take advantage of the forbearance options must also extend benefits to their tenants, according to HousingWire.

To qualify, landlords must notify tenants about the protections they have available, and agree not to evict tenants for nonpayment of rent while the property is in forbearance.

Many landlords may feel relieved by the extension: About 12 percent of landlords with mortgages are in forbearances, according to the Urban Institute. Of those landlords, 20 percent are Black and 14 percent are Hispanic.

While the CDC’s eviction moratorium is set to continue through Jan. 31 now that a federal stimulus package has been approved by President Donald Trump, many renters are facing economic hardship from the loss of unemployment benefits, and may be unable to pay rent in the new year — which could subsequently lead to financial trouble for their landlords.

According to the National Multifamily Housing Council, only 75 percent of renters in 11.5 million market-rate apartments paid some or all of their rent by Dec. 6 — the lowest rental payment rate since close to the start of the pandemic. The figure is nearly 8 points lower than it was a year ago.

Source: The Real Deal

The Emergency Eviction and Foreclosure Prevention Act — which was negotiated over days of conferences — would immediately freeze all evictions and foreclosures for small property owners for two months. The legislation will come up for a vote on Monday, and if passed, will be sent to Gov. Andrew Cuomo’s desk for approval.

Cuomo had previously said he intended to extend existing legislation limiting evictions, portions of which were to expire at the end of the year. The new legislation is significantly broader than the Tenant Safe Harbor Act.

After the initial two-month freeze on all evictions and small mortgage foreclosures, the new legislation will limit evictions arising from both holdover and non-payment. Tenants could receive protection from eviction by filing a hardship declaration with their landlord, rather than making an affidavit in court.

Ongoing eviction proceedings would be stayed, and tenants could petition to remove default judgments.

The limits would be in place until May 1, two months sooner than an initial proposed draft of the legislation called for, and much sooner than a proposal on the table earlier this year that would have banned evictions indefinitely.

Tenants hailed the legislation as a victory — although it was not the measure initially pushed by tenant groups — but the reaction from the real estate industry has ranged from lukewarm to outrage.

Sherwin Belkin, a partner at Belkin Burden Goldman, said that the legislation erodes due process rights for landlords by not requiring an affidavit from renters in order to receive protection. Tenants also do not have to provide any evidence to support the hardship claim.

The existing legislation, the Tenant Safe Harbor Act, “while not perfect, tried to strike a balance” between the rights and needs of both property owners and tenants, Belkin said. “This bill does not even pretend to try to strike a balance.”

Source: The Real Deal

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