Going for Distressed Sales and Leases - It's Happening Again

It happens every time there's a shock, a crisis, an upheaval, and now a pandemic. It's important to note that even in these times, some people are benefitting off of distressed real estate. Some businesses who haven't been hit with revenue issues have been leasing and buying commercial spaces at excellent terms.

LA DWP just signed on for a 10 year lease for a property in DTLA. 132,000sf. https://therealdeal.com/la/2020/05/20/power-lease-ladwp-inks-deal-for-132k-sf-at-downtown-office/

Jellyfish just left WeWork and signed on for 2 entire floors of the Valentino building in NYC's midtown. They probably wanted to keep their staff isolated a bit more.
https://commercialobserver.com/2020/04/marketer-jellyfish-leaves-wework-for-10k-sf-in-midtown/

The historic building dubbed the "Pottery Barn Building" in Old Town Pasadena just sold for only $16m. A steal for a corner property that will go up in value once things calm down.  https://labusinessjournal.com/news/2020/may/18/retail-site-pasadena-fetches-16-million/

Facebook is about to sign a lease for a humongous space at the Farley Post Office building in NY. https://www.vno.com/office/property/the-farley-building/3313609/landing

The Centinela, a 48-unit building in Santa Monica just sold. Only $12M. In SANTA MONICA. Upside potential on this place for sure. https://labusinessjournal.com/news/2020/may/04/santa-monica-multifamily-sells-12-million/

Housing + Necessity Spending = The New Normal

One thing's certain, and that is the future is uncertain. For most of us, there's no frame of reference for what is happening. Even the folks who grew up during the Great Depression know this is different, because the economy wasn't global back then. 

For housing, what does this mean? No doubt housing is taking a hit in terms of lowered activity, price plateaus, etc, but the fact remains, housing is a necessity.

What studies are showing is that on average, many Americans who are in a position to save even a little bit, are saving like never before. They are spending less on unnecessary items, and spending conservatively on food and housing. If there's any silver lining in all of this, it's that people have become more conscious of the value of money, and how having even a small amount of savings will be absolutely necessary. This is the new normal. Until there's a vaccine, of course.

Culture is also changing. Working from home is going to be the new norm for sure. Twitter just said that their employees can work from home forever. More companies will follow, I'm sure of it. And why not? The companies won't have to own or lease out expensive office space, and have all the crazy overhead. But of course, employees will be making their own overhead in their homes. They'll need a office corner, or if the space permits, an entire room for a home office. No doubt some people will upgrade their homes for a larger space to accommodate working remotely. 

At least until there's a vaccine, the way we socialize will be changed too. In the short term, people will travel less abroad, and more people will have local outings. Some city dwellers will want a yard--I have clients who've said this experience has made them want to have a little piece of the outside for themselves. I also have a few clients who have said that the isolation of living in a suburb is making them go insane, and they want to move where there's some amount of social interaction where there is more life and walkability. At least for the time being, this is helping move real estate in an unprecedented time. 

April Real Estate Lockdown Debrief - DTLA and Surrounding areas

April 2020 is behind us. As depressing, catastrophic and upending as this is, it will pass. The world might be a little different, but it will pass. If you think about it, events like the 1918 Flu, the Great Depression, the Vietnam War, 9/11, the Great Recession...the world changed afterwards, but these events did pass. 

And because I'm in real estate 24/7, that's what I focus on when the day's activities are done, and how real estate is affected by these events. March 2020 was weird. The early part of month was okay, some fears setting in, watching Italy closely, but seemed like it wasnt a big problem yet here in the U.S., aside from toilet paper. Properties were hitting the market, selling steadily if they were nice and priced right. Then the city-mandated lockdowns hit, things started grinding to a halt, and then on April 1, 2020, the city deemed real estate a non-essential business. 

April 2020 marks a full month of lockdown in L.A. For real estate, this was not good. On April 1, there were to be no open houses and in-person showings, no inspections and appraisals. Sellers pulled their listings, buyers backed out, escrows fell out, though some managed to push through and close. Then on April 13, 2020, real estate was considered essential, but with major restrictions on showings, etc. Amidst this roller coaster, the activity in April wasn't as terrible as you'd think. Even I was surprised. May 2020 should be interesting. 

Quick stats for April 2020 - Single  Family Homes

1. The number of listings to come on the market fell about 20% from the year before. This is significant in that April-May is the BUSIEST time for real estate. However, considering a pandemic, it's amazing inventory fell only 20%.

2. Average # of new listings on the market: 358

3. Average Days on the market: 63

4. Average sold Price/SF: $691/SF

5. Average price drop from original listing price to actual sold price: 9%

Quick stats for April 2020 - Condos

1. The number of listings to come on the market fell about 40% from the year before. This is significant in that April-May is the BUSIEST time for real estate. 

2. Average # of new listings on the market: 21

3. Average Days on the market: 70

4. Average sold Price/SF: $645/SF

5. Average price drop from original listing price to actual sold price: 3%

Real Estate Forecast During COVID-19 + TBT to 2008-2009 Housing Crisis

Unprecedented craziness in the world. 2008-2009 seemed not that long ago, and at the time, it was ultimate craziness. Looking back, there were people who got massively wealthy and there were those who massively lost and there were those who were hardly affected at all. This time won't be too different in some ways.

I've been thinking about this a lot, because as we all know, big events tend to shake things up, and what you decide to do at the time can affect your finances (and usually life) for years to come.

The stock market is going crazy, up and down every other day. Real estate is at a standstill because it's an uncertain time, and government restrictions are in place. Oddly, prices in LA on average are only slightly lower (about 3-4% drop recently) than last year. And about 25% of listed properties are selling--while this is low for the Spring/Summer months, it's amazing to me that there is still activity at all. When I dug deeper, a lot of these sales were investor buys. This is telling me that people with cash or other leverage, are buying up properties. This is exactly what happened in 2008-2009, history repeating itself.

Who bought real estate and other depressed assets back in 2008-2009?  Warren Buffett, as an example. Couple weeks ago, he sold off hundreds of millions in stocks to amass some cash--clearly gearing to buy up things. Yes, WB has cash to burn, but is this something the little folks like us can and should do? Considering that we're going into inflation and cash will be worth less over the next several years, YES. Considerations are buying rent control properties (which are not good for landlords right now) vs non rent control. More on that later.

Who sold real estate back in 2008-2009? Panic-sellers and those who were stretched to the eyeballs in debt and sold to investors mentioned above. These same panic sellers are also selling stocks and gearing to unleash their assets. If you have lots of equity in your properties and have thought of selling in the next 2-3 years, you might want to sell now since selling activity will be slower for the foreseeable future. If you have no equity and are able to pay the bills, then you might want to hold and wait for the next rise, even if it's a micro-rise.

It's a strange time, but we overcame the 1918 Flu and the Great Depression, and we'll overcome this.

Rent Deferrment + Mortgage Forbearance

So much change on a near daily basis, so many unknowns. It's a jarring time for all, but we need to support each other and do the right thing. Both landlords and renters should be compassionate, honest and have integrity. This isn't the time to be taking advantage of  small businesses and little people. This is the only way we can help lessen the pain to the economy, which affects us all. 

Note that rent deferrals means that rent payment is delayed. Deferred rent will still need to be collected at some point, and both Landlords and renters should work out a schedule for deferred payments. Landlords should also be compassionate and consider not charging late fees for deferrals.

Some other options to consider depending on people's situations:

- Rent reduction, whether temporary or permanent

- Partial rent forgiveness

- Early lease termination

Note that for any COVID-19 related rent modifications, the renter must provide some evidence of loss due to the pandemic. This is important because it shows the Landlord that the Tenant is indeed needing relief, and it also helps the Landlord provide evidence to their mortgage lender in case the Landlord is in need of mortgage assistance. Remember, mom-and-pop Landlords are bleeding too. Please be kind to one another and show some sympathy either way.

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See below for Info from the Mayor of L.A.:

On March 23rd the Mayor issued a temporary moratorium on evictions for non-payment of rent for tenants who are unable to pay rent due to circumstances related to the COVID-19 pandemic.

On March 30th, the Mayor halted rent increases on occupied rental units that are subject to the City’s Rent Stabilization Ordinance (RSO). Effective March 31, 2020, Ordinance No. 20-0147-S19 expands protections for tenants during the local emergency in response to COVID-19. Together, these actions are designed to prevent unnecessary housing displacement and to prevent housed individuals from falling into homelessness.

Summary of the protections in place for residential tenancies:

No owner can evict a residential tenant for nonpayment of rent if the tenant is unable to pay rent due to circumstance related to the COVID-19, such as:

• Loss of income due to workplace closure or reduced hours due to COVID-19
• Loss of income or increased child care expenditures due to school closures
• Health care expenditures stemming from COVID-19 infection of the tenant or a member of the tenant’s household who is ill with COVID-19
• Reasonable expenditures stemming from government ordered emergency measures.

"Tenants are still obligated to pay lawfully charged rent."

However, during the emergency period, tenants may not be evicted for failure to pay rent due to the financial impacts related to COVID-19. Tenants will have up to 12 months following the expiration of the local emergency to repay any back rent due. On March 30, 2020, the City Council extended the repayment period from 6 to 12 months.

• No property owner shall exercise a No-fault Eviction during the Local Emergency Period. No-Fault evictions means those not based on an alleged fault of the tenant.
• No property owner may withdraw an occupied residential unit from the rental housing market under the Ellis Act.
• Landlords may not evict tenants due to the presence of unauthorized occupants, pets or nuisance related to COVID-19.
• Landlords may not charge interest or late fees on unpaid rent due to COVID-19.

Landlords are required to give written notice of the eviction protections to tenants within 30 days of March 31, 2020.

How will the City implement the residential eviction moratorium?

Affirmative Defense

Tenants facing eviction have an affirmative defense if the proposed eviction is for non-payment of rent and the tenant’s inability to pay rent results from circumstances related to the COVID-19 emergency. Tenants or their attorneys can raise the existence of this moratorium as a defense in an Unlawful Detainer action. Tenants and their attorneys may argue that they are an Affected Tenant by providing documentation to the Landlord that they have lost substantial income.

Examples of documentation may include, but are not limited to, a letter from the employer citing COVID-19 as a reason for reduced work hours or termination, employer paycheck stubs, bank statements, or school district notifications. Under the Governor’s Emergency Order, tenants should provide this notification to their landlord within 7 days of the rent due date.

What the California State Executive Order Means for Open Houses, Showings, Etc.

Huge disruption is an understatement. This will affect a lot of people in so many ways, especially sellers and buyers who were in the middle of transactional activities. 

Latest from C.A.R., California Association of Realtors:

“Yesterday Governor Newsom and the State Public Health Officer issued Executive Order N-33-20 requiring all Californians to stay home except as needed to maintain continuity of operations in 16 infrastructure sectors. This supersedes all existing local city and county orders that are less restrictive. The real estate industry is not exempt from this prohibition except as needed to maintain “continuity of operation … of … construction, including housing construction.” Therefore, REALTORS® should cease doing all face-to-face marketing or sales activities, including showings, listing appointments, open houses and property inspections. Clients and other consumers are also subject to these orders and should not be visiting properties or conducting other business in person. 

Property management and repair work, which generally involves maintaining sanitary and safety conditions is permissible. Additionally, many other aspects of the real estate industry can continue to occur without in-person contact, including documentation and signing, and in many circumstances, closings. Other activities may also be managed remotely, though there may be some difficulties.”

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There are measures in place that are designed to help protect, so stay informed:

https://www.irs.gov/coronavirus

https://www.consumerfinance.gov/about-us/blog/protect-yourself-financially-from-impact-of-coronavirus/

https://www.congress.gov/bill/116th-congress/house-bill/6201/text

https://www.cnn.com/2020/03/19/success/real-estate-coronavirus/index.html

Things Change in an Instant

Anyone who's read Black Swan by Taleb knows that this is a black swan event. Very strange, unexpected, and often with a huge impact. This pandemic has upended the floor beneath us and changed "normal" life as we know it, at least for now. 

All we can do is do our best to stay healthy and be decent human beings. And try to stay sane while everything is up in the air and in flux. I know it's hard to isolate, especially in L.A. where today is another sunny, blue sky day. 

Some things I've been doing to stay calm and be prepared for when we see the light at the end of the tunnel:

1. Watch some interesting movies or books online as an escape.

2. Exercise at home, to keep healthy, even if just a few stretches each day.

3. Take vitamins, eat an apple or orange if possible, even boiling the rind for tea.

4. Learn to live on less--only buy sustenance items like food and cleaning supplies.

5. Sort through clutter--get rid of unwanted items, finally organize that closet.

6. Learn to say hello and thank you in 10 languages.

7. Deep clean the place--doing a section a day. (e.g. Today I'll be properly wiping down all the upper cabinets of my kitchen, tomorrow the lower cabinets)

8. Give extra attention to your children--human or furry.

9. Plan your next move in real estate as soon as you get the chance--will you rent, will you sell, will you buy? I'm going to hold and refinance.

10. Lots of tax credits, aid and other important updates coming up for individuals and businesses, and these things are constantly changing so check here often:

https://www.irs.gov/coronavirus

https://www.consumerfinance.gov/about-us/blog/protect-yourself-financially-from-impact-of-coronavirus/

https://www.congress.gov/bill/116th-congress/house-bill/6201/text

Coronavirus/COVID-19 & Impact on Real Estate

From the California Association of Realtors, see below. I personally haven't seen a huge drop off in activity. It has slowed down for sure in the past month, but mainly in sales coming on the market. There are some buyers who are taking advantage of this short term downturn and still buying. 

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The rapid growth of COVID-19 (“Coronavirus”) cases continues to create turbulence in the global economy and in domestic financial markets. However, C.A.R. is not revising its current 2020 housing market forecast, but will continue to monitor the market for negative macroeconomic impacts on the demand for housing as well as the supply chain impacts that could adversely affect the cost of new home construction in the coming months and quarters. C.A.R. has created a list of the Top 10 potential impacts that could elicit questions from buyers and sellers over the near term.

1. Forecasts Have Been Downgraded, But Few Economists are Calling for Recession Yet: Last week, the International Monetary Fund (IMF) cut its forecast for global economic growth by 0.1%, but is still calling for an expansion in 2020, albeit at a slower pace. Similar orders of magnitude have been forecast for the domestic economy, with groups like Wells Fargo and others expecting GDP to grow by 10-20 basis points slower than their pre-Coronavirus forecast. Growth is expected to be slower, but the economy is still expected to grow.
2. Mortgage Rates Will Likely Remain Low, Or Even Fall Further As A Result of Coronavirus: The Federal Reserve issued an emergency 50 basis point cut to their target interest rates, and guidance suggests that the Fed may be open to future reductions in order to counteract the negative impacts to financial markets. This should help to reduce the cost of borrowing and make housing more affordable over the near term, which should help to offset some of the negative impacts to housing demand associated with rising uncertainty.
3. Domestic Buyers May Be Discouraged By Rising Uncertainty and Recession Risk, But Is It Still a Good Time to Buy?: This week, mortgage rates fell to an all-time low level of just 3.13%. That is down from 3.80% at the start of the year and represents significant cost savings over the life of a 30-year loan. For buyers who can afford their monthly payments, the economic uncertainty that is driving rates lower provides an opportunity to capitalize on significantly reduced borrowing costs that they will enjoy for years to come. Short-run risks to the economy exist but are arguably offset by long-run benefits of lower rates at the individual level.
4. Financial Market Volatility Could Reduce Demand For Luxury Homes, But Also Create Potential Opportunities for Luxury Home Buyers: The recent turbulence in financial markets has already impacted household wealth. This could reduce demand for luxury homes in California in particular. However, with less luxury buyers, there could be opportunities for price discounts for buyers who choose to remain in the market for high-end properties. Real estate may also act as a buffer against potentially larger declines in the financial markets.
5. Demand From Foreign Home Buyers Could Be Curtailed Over the Near Term: Reduced economic growth in China, specifically, could stifle demand for California real estate this year. However, foreign buyers represented just 3.9% of California’s home sales last year, so the impacts statewide will be muted compared to 6 years ago, when foreign buyers represented 8.0% of the market. In addition, because domestic buyers typically finance their homes in much larger proportions to their foreign counterparts, low rates could stimulate more domestic demand that would help to offset the impact to foreign buyer demand.
6. Foreign Home Sellers May Face Closing Delays: Because the Embassy and many consulates are closed or may have limited hours in China, and elsewhere, there may be difficulty in providing a properly notarized deed to the property that escrow will accept and title will insure.Advise sellers to make efforts to obtain the deed early in the transaction. If sellers are currently in the U.S., make efforts to comply before returning to their foreign home country. If contract has not been accepted, foreign sellers might want to consider a contingency allowing a seller to cancel if they are unable to obtain notarized deed.
7. New Home Construction in California Could Slow Further, Exacerbating Already-Tight Supply: Many of the inputs to California’s Building Industry are sourced from Asian countries including China. As the Coronavirus disrupts these supply chains, the cost of those materials may increase over the short run or become limited, which will increase the cost of construction and potentially reduce the pace of new residential development below its already-lackluster pace in 2020.
8. Low Rates and Fewer New Homes Constructed Should Place Upward Pressure on Home Prices: Improved affordability stemming from lower rates combined with fewer new homes being constructed as the construction supply chain is impacted could lead to more upward pressure on home prices in California. Unsold inventory is already at low levels, and reduced construction activity means that is likely to continue—especially if buyers respond to lower rates.
9. Offsetting Effects Leave C.A.R.’s Housing Market Outlook Unchanged, For Now: The situation remains fluid, and conditions could deteriorate beyond what is currently envisioned depending on the severity and duration of the outbreak, but if current economic forecasts of modest declines in GDP growth are realized, the effects of lower rates should help to offset the effects of a slower economy and increased economic uncertainty such that California would still achieve a modest improvement in both home sales and prices this year.
10. Eventual Rebound Will Take Longer Than It Did With SARS in 2000: At the turn of the century, the negative impact of the SARS virus began to fade within 6 months of the outbreak coming under control. However, unlike with the Coronavirus, SARS did not have significant impacts on either consumer spending or domestic financial markets. The size of the impacted population and the death toll is also much larger with Coronavirus, which suggests that the eventual recovery will play out over a longer period of time.

It’s clear that the Coronavirus will have an impact on the economy and the housing market in 2020, but it is also clear that it is not time to panic. The effect of lower rates will help to offset some of the headwinds in the housing market, and forecasts of economic growth by C.A.R. and others have been revised down, but only by 10s of basis points—not hundreds. The situation remains fluid and the California Association of REALTORS® will be monitoring this situation closely and providing updates as information comes to the fore.