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Signed into law by President Trump last Friday, the CARES Act is designed to provide assistance to American workers, families, businesses, municipalities and health care systems through an over $2 trillion stimulus package. Given the enormous reach of the bill, its impact on commercial real estate, and in particular landlords and creditors, is extensive. Here are some important highlights of the Coronavirus Economic Stabilization Act of 2020 as it pertains to commercial real estate:
What support does the CARES Act provide?
The Act provides direct support to multifamily properties in the form of forbearance relief for those with federally backed loans. Section 4023 of the Act specifies that multifamily borrowers with federally backed multifamily mortgage loans experiencing financial hardship due to COVID-19 may submit a request for forbearance to the borrower’s servicer affirming that the multifamily borrower is experiencing financial hardship as a result of the COVID-19 crisis. Servicers should provide the forbearance for up to 30 days to those multifamily borrowers showing such financial hardship, which forbearance may be extended for two additional 30 day periods. By availing itself of the forbearance under Section 4023 of the Act, a multifamily borrower may not, during the forbearance term, evict or initiate eviction proceedings against a tenant solely for nonpayment of rent or other charges and may not charge any late fees, penalties or other charges to such tenant for late payment of rent. Likewise, multifamily borrowers receiving forbearance may not issue a notice to vacate to a tenant during the forbearance, nor require a tenant to vacate a dwelling unit earlier than 30 days after the date such tenant is provided with notice to vacate. Federally backed multifamily mortgage loans include those purchased or securitized by Freddie Mac and Fannie Mae, making this form of relief available to more than 27,000 properties nationally. The FDIC has also encouraged banks to consider short-term mortgage forbearance for multifamily borrowers facing reduced revenue streams as a result of the COVID-19 crisis.
More generally, the CARES Act supports the commercial real estate industry by providing income assistance to residential tenants and consumers and liquidity, in the form of loans and other relief, to commercial tenants. Making direct payments and providing enhanced unemployment benefits to citizens will help stabilize employment and strengthen residents’ ability to make rental payments during the COVID-19 crisis. Smaller commercial tenants may be able to secure funds for essentials like paying rent, mortgages, utilities and payroll through expanded SBA loan programs.
What actions are restricted by the CARES Act?
The legislation places temporary moratoriums on the ability to foreclose on federally backed mortgage loans and evict residential tenants from covered properties, which include properties that have a federally backed mortgage loan or federally backed multifamily mortgage loan, in addition to those participating in other federal housing programs. Section 4022 of the Act allows a borrower with a federally backed mortgage loan experiencing financial hardship due to the COVID-19 crisis to request forbearance for 180 days, which relief may be extended an additional 180 days. Servicers are to provide the forbearance to requesting borrowers with no documentation required beyond the borrower’s attestation to the financial hardship caused by the COVID-19 emergency, and with no fees, penalties or interest charges beyond the amounts scheduled or calculated as if all contractual payments had been made on time and in full. Servicers of federally backed mortgage loans are also barred from initiating foreclosure, moving for a foreclosure judgment or order of sale, or executing a foreclosure-related eviction or sale for at least 60 days beginning March 18, 2020. Under Section 4024, a 120 day moratorium effective from enactment of the Act was placed on actions to recover possession of a covered dwelling from a tenant for nonpayment of rent or other charges. Residential landlords may not require a tenant to vacate a covered dwelling unit earlier than 30 days after providing the tenant with such notice to vacate, nor issue a notice to vacate during the 120 day period.
What is the latest from New Jersey and Pennsylvania?
Although ever-changing, like everything involving the COVID-19 crisis, landlords and creditors must also be aware of new legislation and current executive and judicial orders issued at the State level. As of this writing, below is the latest information on eviction and foreclosure related limitations in Pennsylvania and New Jersey:
Pennsylvania – On March 16, 2020, the Pennsylvania Supreme Court declared a statewide judicial emergency effective until April 14, 2020. On March 18, 2020, the court made clear that during the judicial emergency, no eviction, ejectment or other displacement from a residence based on failure to make payment is permitted. This appears to only apply to residential/consumer matters and not commercial matters (though arguably a personal guaranty of a commercial mortgage may fall into this category). Pennsylvania state courts are currently closed to the public for non-essential functions through at least April 3, 2020. All time calculations and deadlines relevant to court cases or other business are suspended through April 3, 2020.
New Jersey – On March 19, 2020, New Jersey Governor Phil Murphy signed Executive Order No. 106, which imposes a moratorium on removing individuals from their homes via eviction or foreclosure proceedings. The Governor has asked that financial institutions holding residential or commercial mortgages, equity loans, lines of credit or business loans implement a process to work with the borrowers to avoid foreclosure or default arising out of the financial hardships caused by the COVID-19 pandemic, or any government response thereto. On March 28, 2020, Governor Murphy announced a mortgage payment relief initiative for New Jersey homeowners approved by Citigroup, JP Morgan Chase, U.S. Bank, Wells Fargo, Bank of America and over 40 other federal and state-chartered banks, credit unions and servicers offering (i) mortgage payment forbearance of up to 90 days to borrowers economically impacted by COVID-19, (ii) a moratorium on foreclosure sales or evictions of at least 60 days, (iii) relief from mortgage-related late fees and other charges for at least 90 days for borrowers requesting COVID-19 related assistance and (iv) restricting financial institutions from negative credit reporting for borrowers requesting COVID-19 related relief. He has also instructed residential landlords in the State to work with renters so they can remain in their homes, and warned that those who seek to evict tenants during this time will face stern consequences for violating the eviction moratorium.
What are the implications for residential and commercial landlords?
Given the eviction moratoriums presently in place and the importance placed by the CARES Act on allowing owners and renters to remain in their homes, multifamily owners who experience significant revenue declines may need to make use of the forbearance options or negotiate loan modifications or extensions with creditors. Commercial landlords will likely need to negotiate with both their tenants who are facing significant economic stress in keeping up with rent obligations and their lenders. In the current COVID-19 crisis, being proactive and initiating conversations is definitely preferred over the “wait and see” approach.Borrowers should review their loan covenants now, particularly for any material adverse change, force majeure and similar clauses; test any cash flow or financial covenants; and review any limitations on their ability to modify, cancel or amend leases, property management agreements or other key contracts. Commercial leases must be reviewed to confirm whether the COVID-19 crisis qualifies as a force majeure event or triggers common law doctrines of impossibility, impracticability and/or frustration of purpose which may be applicable depending on the jurisdiction. Co-tenancy, continuous operations, access, exclusive and other use restrictions may also be impacted as a result of State or local restrictions and orders being in effect, for example allowing dine-in restaurant tenants to convert to take-out only service.
Landlords should also take the following actions to strengthen their tenant and lender relationships and in anticipation of heightened lender diligence:
- Consider imposing new or additional health, safety and maintenance regulations and performing increased cleaning activities at the subject property, and develop an employee or critical staff contingency plan that can be shared with lenders
- Document all communications with tenants regarding the COVID-19 emergency and any rental payment obligations, but make clear no modifications, forbearance or waivers of any lease terms are approved until documented in a formal amendment or agreement
Eliminate unnecessary expenses and consider creative solutions to reduce marginal costs
- Develop a cash flow forecast that projects anticipated liquidity for 30, 60, 90 days based on stated assumptions and update the cash flow forecast with data as information becomes available
Review all business interruption, rent loss and similar insurance policies to determine whether insurance benefits are available
- In addition to the above steps, landlords and borrowers would be well served to educate themselves about the relief programs available to their tenants. Encouraging residential tenants to secure direct cash payments under the CARES Act and commercial tenants to consider these new loan programs providing funding for rent payments, should increase the probability that tenants will satisfy their rental obligations.
If you have any questions or to further discuss the impact of the CARES Act on landlords and creditors, please contact Lauren Beetle at 856.355.2913 or firstname.lastname@example.org or Julie Murphy at 856.355.2992 or email@example.com.
The U.S. real estate market saw a record infusion of $70 billion from foreign investors in 2015, but a decline in the pace of foreign capital fundraising may be the first sign of a slowdown in overall foreign investment in the U.S. real estate market, according to a news report from the CoStar Group.
The growth rate at which overseas investors are raising capital grew by only 3% in 2015 in comparison to 2014’s growth rate of 21%, CoStar reported, noting that the Americas and the Europe-Middle East-Africa (EMEA) regions experienced a foreign capital fundraising growth rate of under 2%.
On one hand, plummeting oil prices have shrunk the amount of investment capital in the Middle East, and government officials in China reportedly are more and more wary about the sum of investor capital leaving their country for foreign borders, industry experts told CoStar.
But on the other hand, the experts expect market dynamics such as quantitative easing and interest rates to overshadow international market insecurities, keeping foreign capital flowing and real estate appealing to investors, the news report said.
Both large and liquid markets in the U.S., China, the UK, Japan and Germany are likely to benefit from strategic deployment of the record $443 billion in capital raised for investment in commercial properties worldwide, CoStar’s new report said quoting industry experts. But look for foreign investors to reduce risk by opting to invest through join ventures and platform deals as opposed to direct investment, an expert told CoStar.
Last year’s record foreign investment in the U.S. real estate market, which contributed to the solid increase in property values and rate of transactions for the entire year, was strongest in the fourth quarter 2015, reaching its highest level since 2007, CoStar reported.
But in the first quarter of 2016, transaction activity fell precipitously as investors worldwide assessed market volatility, confirming expectations that 2015’s high level of foreign investment in the U.S. could not be maintained for very long, the report said.
Preliminary data from CoStar found that overall deal volume dropped about $40 billion in first quarter 2015, including a decline of $30 billion from domestic buyers and $10 billion from foreign investors. Still, the recent trend for overseas capital to favor U.S. assets is likely to continue, but at “uncertain levels,” according to the report.
One CoStar Portfolio Strategy executive noted that while “there are few economies that look as attractive as the U.S., relative pricing still impacts investor desire.”
“If assets seem too richly priced, then rational capital may look elsewhere,” according to the executive. “Cap rates have been driven lower and gateway cities are priced dearly relative to history. But relative to alternatives in Europe, they’re on the right side of the chart.”
The record $70 billion in foreign investment in the U.S. real estate market represented 11% of the more than $600 billion invested in all commercial real estate in the U.S. in 2015, CoStar said. However, foreign investment is likely much higher because foreign entities often co-invest with U.S. companies taking the role as the general partner, meaning the transaction is considered a domestic investment.
The biggest source of foreign investment in the U.S. real estate market comes from the United States’ neighbor to the north. Canadian investors — primarily pension funds and other institutional capital — have long favored U.S. office buildings and lately, apartment properties. Since 2014, Canada has represented 28% of direct foreign investment into the U.S., followed by Western Europe at 23%; China and Hong Kong at 14%; Southeast Asia, including Singapore, at 13%; the Middle East nations at 11%; South Korea at 4%; and Japan at 2%.
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