'Carnage,' Taxes And Disappearing Runway: California CRE Pushes Back Against Deeper Lockdown

Tens of millions of Californians are under new stay-at-home orders lasting into the new year as the coronavirus health crisis worsens.

All regions in California are expected to drop below 15% available intensive care unit beds at some point this month. But the Southern California and San Joaquin Valley regions, as defined by the state, have already passed that threshold, and stay-at-home orders began Sunday night. 

The new stay-at-home orders ask people to stay home and avoid nonessential trips. The rules allow for indoor retailers to be open but limit them to 20% capacity. Outdoor dining is not allowed, though takeout and delivery are. Under the new restrictions, hotels are only supposed to be in use for coronavirus mitigation and containment purposes or as housing for essential workers and unhoused people. 

For many in commercial real estate, these shutdowns, while anticipated, will still hit hard. “It’s just adding more dire consequences on top of preexisting ones since March,” said Donald Wise, senior managing director of commercial real estate investment banking firm Turnbull Capital Group.

Bay Area counties San Francisco, Santa Clara, Marin, Contra Costa and Alameda plus the city of Berkeley preemptively launched their shutdown Sunday, though their region still had about 24% of its ICU beds open as of Sunday night. The stay-at-home orders, once implemented, will be in place for at least three weeks. 

The restrictions are not as far-reaching as the March lockdown orders, but they come after many challenging months of bending to accommodate frequently changing rules. 

Hotels nationwide have been struggling throughout the pandemic. A November study from the American Hotel and Lodging Association with more than 1,200 respondents found that 71% of hotel owners said they couldn’t last another six months without federal assistance, an increase from 67% in September.

During the pandemic, Wise’s Turnbull Capital Group has zeroed in on providing preferred equity to distressed hotel and resort owners. Wise says requests from hotel and resort owners have increased exponentially each week, and he said he expects to be increasingly busy, as the new shutdowns are set to overlap with many forbearances timing out. 

Property taxes are also coming due for many properties, and many owners are so lacking in liquidity they may not even be able to pay their transient occupancy taxes. For hotels, “the vast majority of the carnage has not really started yet,” Wise said. 

It isn’t just hotels, of course. Compared to the March closures, now “retail business owners have less runway, having used savings and reserves during the first shutdown,” said David Greensfelder, managing principal of Greensfelder Commercial Real Estate.

NewMark Merrill Cos. President and CEO Sandy Sigal said he is disappointed that a “one size fits all” approach is being applied to businesses that follow the rules instead of just to proprietors who break them and should rightfully be shuttered. 

“Why should they be shut down, after following all the rules our business community was asked to follow, with no proof they have contributed at all to this terrible pandemic?” Sigal said.

The Centers for Disease Control and Prevention has said that the risk of COVID-19 spread increases in any public setting as interactions within 6 feet of others increase, especially if people are unmasked. The difficulty of tracing an individual's infection source has lead public health experts to recommend widespread shutdowns.

Sigal’s sentiments reflect a pushback that has appeared in all corners of the business community, one that indicates frustration with public health officials and regulations that some say seem inconsistent or not based on sufficient proof.

In some counties, law enforcement officials have said they won’t carry out the rules. 

Riverside County Sheriff Chad Bianco, whose county is in the Southern California region and shut down Sunday, said in a video released Friday he would not crack down on those violating shutdown rules because “the metrics used for closures are unbelievably faulty and are not representative of true numbers and are disastrous for Riverside County.”

According to Riverside County officials, total COVID-positive hospitalizations have set new highs each day this week and as of Dec. 4, there were 658 COVID-positive patients hospitalized, including 135 patients requiring treatment in an intensive care unit. By comparison, in July, the highest number of COVID-positive hospitalizations was 550, with as many as 167 patients in the ICU.

Orange County Sheriff Don Barnes said in a statement that his officers would not respond to calls relating to breaking the stay-at-home order rules, including those for people having large gatherings or not wearing face coverings. 

Before the state rules went into effect, resistance to an LA County order halting outdoor dining served as a preview of the current pushback. 

Beverly Hills passed a resolution opposing the LA County decision in late November that shuttered outdoor dining. Pasadena, which is in LA County but has its own health department, kept outdoor dining open as it closed elsewhere in the county. Pasadena did close outdoor dining as a result of the state order. 

“There seems to be a lot more pushback from retail tenants in general at a municipal level than we saw in March,” JLL Southwest Market Director Peter Belisle said. “I think this will create a more challenging political landscape, as it feels that the effectiveness of some of these measures is being questioned by a broader population, both customers as well as tenants and businesses."

Opposition grows as cases continue to swell across the state, and some counties break recently set records. In LA County, cases have soared over the last seven days, “shattering” the previous record for highest daily number of new cases, public health officials announced Sunday. More than 10,000 coronavirus cases were reported over the weekend.

In the Bay Area, the counties of Santa Clara, San Francisco and Contra Costa all recorded their most-ever coronavirus cases, “beating out new daily case records that were broken in the past four out of six days,” the Mercury News reported Sunday.

“While, on the whole, we’ve had better results than most states in keeping the spread under control, the current situation shows that with all the sacrifices that have been made, we’re still not able to control COVID-19,” Bay Area Council President and CEO Jim Wunderman said.