Commercial real estate struggles amid virus-choked environment

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While some sectors are being impacted more than others, commercial real estate on Long Island is now sharing the pain that the COVID-19 virus and its protocols continue to inflict on the region.

Clearly the hospitality and retail sectors have been the first to show the scars, as empty hotels and restaurants struggle to survive the stay-at-home and social-distancing rules the state has put in place, but they won’t be the only ones to suffer. 

Brokers say vacancies are likely to rise across the board, especially in the office and industrial real estate markets, though a segment of the latter will remain robust with the increasing demand for warehousing and distribution facilities from online merchants and delivery businesses.

One of the safest property types on Long Island remains multifamily rentals, especially as investors pivot to safer havens in the current low-interest-rate environment. But even owners of apartment buildings may see a short-term dip from their usual 95-percent-and-up occupancy rates, as the ranks of the unemployed swell through the next couple of months or so.

Hotels here are in a world of hurt. The occupancy rate for hotels in Nassau and Suffolk counties has dropped steadily since the beginning of March. Last week, the occupancy rate at hotels on Long Island fell to 32.1 percent, less than half of the 65.2 percent occupancy rate recorded two weeks prior, according to numbers from STR. In addition, revenue per available room plunged to just $37.81 last week, a substantial decline from the $88.16 reported by STR for the first week in March.

As LIBN reported last week, struggling retail tenants have been contacting their landlords about not being able to make rent payments. Some landlords are deferring rent for a few months and some are accepting partial payments, though property owners say they will need similar considerations from their lenders.

The same situation is also playing out with office and industrial tenants whose operations have been shuttered due to the state’s guidance on non-essential business.

“Tenants are calling and the number one question they have is ‘Do we have to pay the rent?’,” said Adam Rochlin, principal of The Rochlin Organization, a Melville-based brokerage firm that represents about 3 million square feet of office space.

Rochlin said two tenants that had already signed leases and were supposed to begin occupying their new spaces on April 1 now want to push that back for 90 days. 

“The problem is that the landlords have invested money and were expecting to see revenue from those tenants,” he said.

Rochlin suggested that the federal government needs to loosen regulations on defaulted commercial mortgages and allow forbearance of payments for three months.

Jonathan Goldman, a principal of Jericho-based M. Robert Goldman & Company, a mortgage banker servicing more than $2 billion in commercial property loans, said lenders will need to show some flexibility.

“Most portfolio lending sources, such as banks, insurance companies and credit unions, realize that they’ll have to make accommodations on a case-by-case basis for properties where tenants are unable to pay rent because of the COVID-19 pandemic,” Goldman said. “By early April, we expect that the National Association of Insurance Commissioners will provide their members the flexibility they need to make case-by-case modifications on performing loans without an increase in capital charges. The Federal Reserve and the Treasury Department gave banks similar guidance about a week ago.”

Meanwhile, commercial real estate brokerage firms are trying to navigate the new COVID-19 landscape, with their brokers working remotely and keeping in touch with their clients. However, most are reporting a slowdown in activity.

“There’s not a lot of business going on,” said Brian Lee, a principal of Newmark Knight Frank’s Long Island office. “Real estate is one of the industries with long-term commitments. Very few are willing to make those in this environment.”

According to his assessment, the closing of businesses and curtailing of their operations could impact demand for office space, where there could see more consolidation. 

“But there remains a supply-constrained environment on Long Island, so it may not be as bad as in other markets,” Lee said. “The industrial market will remain strong, especially because of the continued demand for warehouse and distribution operations from online businesses.”

And Lee insists there are opportunities in every crisis.

“If you recognize and take advantage of those you can have tremendous success during a cycle like this,” he said. “We can help many clients with creative real estate solutions to help lessen the impact on their businesses and real estate.”

Not listed as an essential business, real estate trade groups, such as the Commercial Industrial Brokers Society of Long Island, have appealed to the governor’s office to be recognized as essential.

In a letter to the state’s Economic Development Office, CIBS-LI President David Leviton wrote: “As the need for physical locations for the delivery of medical services will significantly expand over the next weeks and months, the brokerage community will be called upon by its medical and related strategic clients to assist in the expansion. The lack of an essential business designation for the pertinent brokerage community will slow down the acquisition or leasing of additional space and inhibit vital medical services.” 

In addition, the letter maintained that “commercial real estate brokers involved in negotiations for warehouse space should also be designated as essential workers to the extent they represent parties in warehouse and logistic distribution leasing and sale transactions…without commercial brokers and their knowledge of the scarce available sites, the process of obtaining space for the storage and distribution of crucial medical equipment and products, as well as other essentials, will be intolerably delayed.”

Leviton, who is also managing director of JLL’s Long Island office, said the industry is bracing for the impact of the COVID-19 virus and its related considerations.

“Due to the unknowns about the duration and extent of the disease spread, it’s hard to predict how long the impact will be,” Leviton said. “In times of uncertainty, we often see delays in decision making for leasing and investment as well as moderating demand as short-term cost reduction can overtake long-term planning.”

But Leviton said there are other things to think about besides the business implications.

“We must take care of our families to stay safe and healthy,” he said. “We are all in this together, and now is the time to support each other so that we can solve our current challenges, be ready as things improve and come out of this stronger.”

Lee agreed with that sentiment.

“It’s important during this time to reach out to clients and assist them in any way you can, whether it’s about business or not,” he said. “This is the time to give back to the community, clients and friends.”