A report from the Wall Street Journal. “After the coronavirus pandemic shut many businesses this spring, the three major credit-ratings firms placed about 2,400 bonds tied to pools of corporate loans on review for possible downgrades. The potential wave has turned out to be more of a dribble. Many worried the downgrades would rattle the $700 billion market for collateralized loan obligations, or CLOs, which have drawn comparisons to the subprime mortgage-backed securities central to the financial crisis.”
“Worries persist over whether ratings accurately reflect the risk that investors are taking on when they buy CLO debt. A review published in the Journal of Structured Finance found that ratings firms are inconsistent in how they apply their methodologies to CLOs and may be deviating from the criteria, which govern how grades are supposed to be assigned.”
“‘What do the ratings mean when the ratings firms are not following their methodologies or deviating from them?’ said Gene Phillips, a former Moody’s analyst who co-wrote the report. ‘It can become very difficult for a user to make heads or tails of it.’”
From Bisnow New York. “As investment sales have come screeching to a halt in New York City, buyers and sellers remain oceans apart when it comes to pricing. Right now, commercial real estate buyers in the New York metro area have price expectations that are 27% below what investment property owners want, according to Real Capital Analytics and the MIT Center for Real Estate Price Dynamics Platform.”
“‘There will be a reckoning at some point on the income shortfalls [owners] are facing — and that may force some hard discussions with their lenders that could lead to some distressed sales,’ said RCA Senior Vice President Jim Costello. ‘We aren’t there yet, but that should be coming … There will come a point where owners cannot count on forbearance to come from their lenders.’”
“This week, Ashford Hospitality Trust announced that it had sold its Embassy Suites by Hilton Hotel in Midtown, in order to meet demands from lenders. It first defaulted on payments in April and was issued an ‘acceleration notice’ from Wells Fargo, the CMBS servicer, in May.”
“Plus, many sales deals that were in the works were put on ice as a result of the pandemic, and brokers told Bisnow this week scores of contracts had to be renegotiated and asking prices reduced in many cases. B6 partner DJ Johnston said of the 30 listings his team is now marketing, there is an average of between 5% and 10% discount on each.”
From WBUR in Massachusetts. “On a Monday evening in the last full week of August, a landlord held an open house for a two-bedroom condo rental in Dorchester. The price: $2,000 a month. Many renters would tell you that’s a steal in this city. But this unit has been on the market since July, and it’s still empty.These days, landlords said it’s not surprising to find a vacant apartment, something that would have seemed almost unthinkable at this time of year in summers past.”
“Sept. 1 — the start of many new leases in the city — is usually marked by moving trucks lining and blocking Boston streets as students arrive and residents move into new digs. But as with so many things, the date Bostonians affectionately refer to as ‘Allston Christmas,’ may be different this year because of COVID-19. ‘This is probably the longest we’ve had our place on the market,”‘ said Mindy Wright, owner of the yet-to-be-rented Dorchester condo. ‘It usually rents pretty quickly.’”
“The result is that fewer students are looking to rent across the city, according to economist Joshua Clark, who analyzes rental markets for the real estate website Zillow. ‘We have a whole new situation now,’ he said. ‘The city of Boston and the metro area is usually getting ready right now for a flood of students to come on down to town and take up a huge amount of the demand and need a lot of supply that we see around the city.’”
“A smaller influx of students isn’t the only variable affecting demand. There’s also increased unemployment. And it’s having an impact on rental prices, according to Clark. ‘Right now, if you are making money in Boston, if you are a lucky person who’s been able to keep their job — and I know that’s less common these days than normal — but right now is a great time to find deals,’ he said. ‘The amount of promotions available right now are very great.’”
“Mindy Wright, the owner of the condo in Dorchester, said if no one moves in on September 1, she’s hoping to find a tenant for September 15. If not, she said she and her family might be able to afford to go without a tenant for six months. After that, she’s not so sure. And Wright said she knows other landlords may not be able to wait that long.”
From Seattle PI in Washington. “As the coronavirus pandemic continues, Seattle is seeing its rent prices dropping, according to a new study. The report from ApartmentList found Seattle has had the ninth biggest rent decrease among large cities since the start of the pandemic. According to the study, some of the most expensive markets — such as Seattle, San Francisco and New York — were seeing the most significant drops in rent prices.”
“‘Since the start of the COVID-19 pandemic, we have seen shelter-in-place ordinances put a halt to normal moving activity, combined with staggering job losses as huge segments of the economy were put on pause,’ the study said. ‘These unprecedented forces have dampened the demand for rental housing across the country.’”
The Washingtonian. “It’s been a surprisingly full summer of restaurant openings around DC. But the reality is we haven’t seen the true crushing impact of Covid-19 on new restaurant development yet. The vast majority of places popping up now were in the works long before this pandemic began. It could take a year or more before we see what the damage really looks like. ‘We’re starting to smell the smoke from the fire. Either that fire is going to get put out, or it’s a going to be a blaze by the end of the year,’ says veteran real estate broker John Asadoorian.”
“Rents in red-hot neighborhoods like 14th Street and Georgetown are coming down, and some landlords across the city are willing to offer more aggressive deals, but that’s not the norm, Asadoorian says. ‘From the landlord side, the world hasn’t ended yet, so they’re not throwing in the towel,’ he says. ‘Some people are still in a little bit of denial.’”
“Over the last few months, Aaron Gordon, who owns Chevy Chase bistro Little Beast and 14th Street pizza place Red Light, quickly converted a Glover Park tavern into a ‘ghost food hall’ called Ghostline where five different chefs will operate 10 different concepts for takeout and delivery. (There’s also a patio, but no indoor seating.) The buildout cost $300,000, a fraction of most restaurants, and a ‘Covid discount’ from the landlord helped. But Gordon says most landlords are ‘stuck pre-pandemic, almost like dummies.’”
From Eater Los Angeles on California. “The restaurant industry is in the middle of a massive reset. After years of an ever-expanding market, the COVID-19 pandemic has triggered a correction to the industry not just in Los Angeles, but nationwide. When cities began issuing stay-at-home orders in mid-March, bars and restaurants were left with little to no business beyond meager takeout sales, yet often faced rents that remained at pre-pandemic levels.”
“This situation became untenable for scores of restaurants and led to a wave of closures hitting every tier of the industry — from smaller mom and pops, to corporate chains like the Cheesecake Factory and even buzzy fine dining spots. Now, with a sea of new vacancies, a standstill in new leases, and remaining businesses operating at a fraction of their previous levels, restaurants are being forced to adapt to a new landscape, and landlords are facing a reckoning of their own.”
“Heading into March 2020, rents for restaurant spaces in LA were riding a decade-long wave upward. Over the last 20 years, the number of restaurants in the US grew at twice the rate of the general population, while the rate of middle-class ($45,000-$75,000) job growth in the industry was triple the rate of the overall economy’s growth since 2010.”
“By the start of 2020, restaurant operators were being squeezed to their limits. ‘Anything up to February 2020 was a leasing market with a never-ending peak,’ says Francesco Zimone, owner of L’Antica Pizzeria da Michele in Hollywood. To recoup costs and turn even the slimmest margins, restaurants relied on various tactics to increase margins (urging more alcohol sales, offering higher-margin small plate menus, and generally increasing prices). But there is a natural limit to this growth, and ‘it makes it really, really tough,’ Zimone continues. ‘No matter how hard you try, no matter how much money we’re making, and how good we are, the profits are not there.’”
From Bloomberg. “U.S. Real Estate Pain Leaves Foreign Investors Holding the Bag. Foreign investors who backed real estate projects in return for U.S. visas are emerging as losers in the pandemic-driven commercial property crisis. In Manhattan, Chinese investors who helped fund Related Cos.’ Hudson Yards have called for arbitration to pressure the developer into returning their money. On Long Island, a separate group assumed the lease to the Nassau Coliseum, after billionaire Mikhail Prokhorov’s Onexim Sports and Entertainment decided to walk away from the project.”
“The investors, who backed development deals through the U.S. Citizenship and Immigration Services’ EB-5 program, aren’t the only ones getting hammered by the Covid-19 pandemic, which has kept mall-goers, hotel guests and office workers home, pushing commercial-property owners into delinquency. But EB-5 investors, who cared more about coming to the U.S. than financial returns, have less leverage than most.”
“At Hudson Yards, roughly 2,000 EB-5 investors poured $1 billion into the Manhattan project through a series of deals, according to a demand for arbitration filed recently by Chicago lawyer Doug Litowitz. The investors were unsophisticated about U.S. real estate, according to Litowitz, and were told by the Chinese firm that helped Related raise money that they would be repaid following approval of their work visas, known as green cards. But the funding was structured as a preferred equity investment, not a loan, and there was no fixed timetable for returning the money.”
“‘The Related deal is interesting because the terms given to the Chinese are so bad that it’s almost like a test case for how bad a structure can be and still be legal,’ said Litowitz. ‘Dostoyevsky said, ‘If murder is allowed, everything is allowed.’ That’s how I feel about this case.’”