Uncertainty, Cautious Optimism In CRE During COVID-19

It’s a little too early in the month to tell just how bad delinquent rent is, but panelists on Bisnow’s webinar “CRE & Coronavirus: How is COVID-19 Impacting The Mile High City?” expressed cautious optimism.

RedPeak Chief Investment Officer Bobby Hutchinson said his company was concerned with April and wasn’t sure what to expect, though it did proactively reach out to its resident base. Hutchinson said as of April 7, RedPeak is 81% collected relative to last month, which is better than his team expected.

But, rent didn’t officially become late until April 8. Hutchinson said RedPeak rolled out a plan for residents who are unable to pay immediately. 

Evergreen principal and Regional President Jeff Wikstrom said his company has had good luck this month. Evergreen works with three different management companies, and delinquencies are as low as 10% in April. 

Like Hutchinson, Holland Partner Group Managing Director Walter Armer said it was “a bit early in the month,” but that the delinquencies in Holland’s Denver portfolio aren’t bad, at about 6% to 8%. He said 4% to 6% is generally the norm. 

“The big question is, what’s going to happen in May?” he said. 

While Armer said relatively few residents have reached out to ask for a deferment plan, he and many others believe the issue of rent delinquencies could be more widespread next month. 

Hutchinson was asked by the webinar moderator, Pinnacle Real Estate Advisors Principal Managing Director James Mansfield, if RedPeak saw any correlation between those who need rent assistance and the rental rate of the property they resided in. RedPeak’s properties have a price range from around $1.3K going upward. 

RedPeak’s properties that cost over $2K per month have seen fewer collection issues, Hutchinson said, but he is expecting to see bigger issues than it has at the units under $1.3K than the ones moving toward $2K per month. 

RedPeak extended its grace period, so the next few days could show a rise in these issues. 

Though Wikstrom said Evergreen’s residential delinquencies haven’t been too bad, he said it started getting calls from its retail tenants “almost immediately.” He said the essential goods group of retailers, including grocery stores, auto parts and electronics relating to home offices, have done well. However, the mom-and-pop restaurants started calling Evergreen the first day Colorado got its stay-at-home order, he said. 

The CRE experts also discussed future transactions and investments. Just Monday, it was announced that AMLI Residential had purchased a parcel of land in Broadway Park and would develop more than 300 apartment units.

Wickstrom said Evergreen has three open transactions to either buy or sell properties that were value-add or already leased up and ready to go. He said these are becoming more virtual and taking more time, as inspections by the city have slowed down. 

He said it is also seeing an impact from buyers trying to get agency debt. There has been a slowdown there, as it’s difficult to get a good estimate or price quote from agencies, as treasuries have been “moving all over the place.” 

Hutchinson said RedPeak closed last week on a transaction that had been put in place before the COVID-19 crisis. Looking forward, he said it plans to be an active participant in the market and to add to its portfolio, though it will be “a little bit more cautious” about deals. 

“Right now there’s not a lot of visibility into what the next six months might look like from a cash flow perspective,” he said, adding that the pricing impact of this crisis is unclear as well. 

“Overall, I think you’ll see a drop in transaction volume,” Hutchinson said. “I think that most sellers that don’t have strong motivation to bring properties to market are going to be slow to do so. I think that you’re going to see on the institutional side less buying activity in the near term. ... A lot of buyers are going to be a little bit reluctant to push pricing too far until they get better clarity as to what the forward cash flow looks like.” 

Looking ahead, Armer said this crisis will likely have an impact on retail in Holland Partner Group’s projects. 

“We all knew that retail had a lot of sensitivity to the economy and changes that are happening,” he said. “And that was really brought home over the last few weeks.” 

He said to the extent that it can, Holland will be more thoughtful about how it lays out retail, and how much is included in its projects. 

Additionally, he said the discussions surrounding the interior of apartment units will change; building in desks or office nooks will be something to consider moving forward, he said, as long term this crisis will alter how companies and individuals work remotely more often. 

When asked what it might take to get Denver to recover, Armer echoed what many say about the metro. 

While expressing hope that social distancing will have an impact on flattening the curve, he said that long term the metro will likely take a big hit economically. He said Holland’s economist predicted around 100,000 job losses, but that a lot of them might be reinstated quickly. In that case, Denver could get “back up and running” sooner than if those jobs were to permanently disappear. 

“I’m pretty bullish, as is Holland, on Denver,” he said. “There’s a reason we all live here, and that reason isn’t likely to change once we come out of this.”