The pandemic is not the Great Recession. Retail and hospitality are being hit hard, and the office market is vulnerable. But overall—for now—projects still are being built, deals are cautiously getting done and lenders are in a strong position. It's a time to look for opportunities.

Aaron Gilbert has been working in commercial real estate since 1998 when he sold and leased medical office space in The Big Apple. In 2001 he returned to his native Columbus and joined a family-owned retail real estate firm.

Over a 22-year career, Gilbert has seen the industry weather the 2001 recession that was worsened by the Sept. 11, 2001, terrorist attacks and the Great Recession that ended in 2009 but caused pain for years after that. Those shocks to the American economy were gut wrenching for real estate professionals, but they seem like small potatoes compared to the devastation the novel coronavirus is wreaking on his industry today. 

“Given the amount of retail closures, we have never experienced anything like this,” says Gilbert, managing principal of the Gilbert Group. “What complicates all of this is that nobody knows how long it’s going to last.”

Across Ohio, closures have been far reaching since Gov. Mike DeWine in mid-March ordered nonessential businesses including fitness centers, nail salons, barbershops, tattoo parlors, bars and restaurants—except takeout—closed. He then issued a stay-at-home order that started March 23. All those empty stores changed the dynamic among tenants, landlords and their lenders. 

For Gilbert, whose firm owns multi-tenant retail centers and manages a portfolio with 650 commercial tenants, it’s the most challenging situation he’s ever dealt with professionally. Landlords have mortgages to pay and tenants are under lease obligations, whether they’re operating or not. DeWine’s April 1 order that lenders defer payments from landlords for 90 days, while well-intentioned, has only added to frustrations, Gilbert says. By April 8, he had collected about 45 percent of the rent due to him on the first of the month. 

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“I think the order caused way more confusion,” he says. “Tenants are using that order to justify not paying their rental obligations and many lenders are viewing the order as a request and generally are declining. Landlords are still being pushed to make concessions even though their lenders are not making those same concessions. It’s still a mess.”

Gilbert expects most landlords to do everything they can to help their tenants stay in business. There’s a real concern about vacancy rates moving forward, he says. Many landlords are negotiating relief where tenants pay some rent in April, May and June with the balance being amortized over the rest of 2020 or 2021. 

“We continue to connect with our clients and our tenants because each side realizes we are in this together,” Gilbert says. “Landlords want to do the right thing—there’s a connectedness there.”

Empty offices

Retail, leisure and hospitality properties will be the hardest hit asset classes, sources interviewed for this story say. Office buildings will be right behind them. According to a Moody’s Analytics report on COVID-19’s impact on commercial real estate, office vacancies are expected to soar while asking rents decline both this year and the next. 

Michael Copella, the managing director of CBRE in Columbus, says so far he hasn’t seen office tenants moving to sublease space or trying to exit leases, but the longer a shutdown drags on, the more likely those scenarios are to occur. Like retail, office tenants are having conversations with their landlords about what’s possible with rent relief. “Every situation is different, but there’s a sense of flexibility and a willingness to try to work something out,” he says.

According to CBRE, there was 89,420 square feet of office space absorbed in the first quarter in Central Ohio, down from 104,931 square feet in the same quarter of 2019. In Copella’s opinion, that’s “a fairly slow start to the year and, given our belief that transactions will slow in the second quarter, it could mean that available space may sit vacant for longer, which might lower rental rates.”

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While Copella says office buildings in the city are only about 25 percent occupied now, he doesn’t expect the market to shrink away as a new work-from-home model rises. 

“Cool offices help companies become an employer of choice,” he says. “Best-in-class employers will have a combination that will allow employees to have the flexibility of working both at home and in the office.”

Logistics up, mom-and-pops down

The pandemic to date has had little effect on building construction projects, says Rick Trott, CBRE’s senior vice president. Here’s what he’s hearing from developers, contractors, project superintendents and private equity firms, which he shared in an update for CBRE: Projects already going are continuing on schedule; most projects that have not broken ground are being postponed but not canceled; most purchase and sale agreements for land and investment sales are being extended; getting approvals from municipalities has been challenging, but they are adapting; developers are leaning toward larger buildings for speculative projects; and lenders are standing behind their clients and are honoring prior commitments.

A silver lining for Central Ohio, Copella says, is that it’s a major distribution hub since it is located within a one-day drive or one-hour flight from more than half of the U.S. “Rickenbacker (International Airport) is a huge strength for us right now,” Copella says. “There is an opportunity where this does change the supply chain. You could see more manufacturing distribution come back into the U.S. Central Ohio is accessible to such a large portion of the population and is known for its distribution talent, so the region could really benefit from this.”

COVID-19 is having more of an impact on mom-and-pops than it is on larger companies, says Mike Simpson, president of NAI Ohio Equities. “Institutional-type clients are still willing to go through with deals,” he says. “Clearly fewer deals will be closed. Thankfully, most are being postponed and not terminated.”

Capital markets have been impacted by the pandemic, with lenders’ appetites for risk diminished, says Doug Falor, vice president and principal at Provident Realty. American Banker recently reported on a Trepp analysis of 12,500 commercial real estate loans held by U.S. banks that determined that industry loss rates could go from less than 1 percent in 2019 to 2.5 percent five years from now. Trepp estimated a 35 percent default rate for the hotel industry.

Federal programs like the stimulus, Paycheck Protection Program and the Commercial Paper Funding Facility—a program that helps companies maintain the flow of short-term debt that funds everyday expenses, including rent—could ease the impact on some businesses, Falor says. “Instead of trying to be precise, policymakers are seemingly casting a wider net with more resources in a proactive manner, economically speaking.”

Opportunity is there

Because DeWine hasn’t closed construction sites, building still is going on across Ohio, including at the mixed-use Bridge Park in Dublin that’s being developed by Crawford Hoying. Brent Crawford, principal and founder, says before the pandemic there was a lot of “froth in the market” with aggressive pricing for real estate and rising costs for materials and labor. So, just like with other downturns, the pandemic likely will lead to a market correction.

Crawford says he and partner Bob Hoying are in the fortunate position of having guided their company through the Great Recession. They are taking lessons learned and applying them to the situation they face today. That includes grabbing market share where they can and taking advantage of longstanding relationships with equity and lending partners. One key difference between now and 2008 is that banks are far better capitalized than they were 12 years ago. Then, they were part of the problem. Now, they are part of the solution, Crawford says. 

“Like in 2008, you have to also look at this difficult situation as an opportunity, which this will be,” Crawford says. “When investors are extremely bullish, it is often the time to sell. And when they are scared, it is a time to buy. We are already are being approached about attractive opportunities in Columbus that we will explore with our banking and investment partners. We’ve been doing this 25 years, so at this point, (we) have seen a few things and know these are the times money can be made, not just lost.” 

Laura Newpoff is a freelance writer.