COVID-19 Slashes Commercial Real Estate Deals in Stricken South Florida

The coronavirus pandemic hasn’t just decreased South Florida commercial real estate deals. It chopped the transaction dollar value by more than half for some property types.

“The impact is across each asset class. We were Wuhan, Florida, for a period of time,” attorney Roland Sanchez-Medina Jr. said of South Florida’s record-breaking COVID-19 cases in midsummer. ”At the time of buying something, the feeling should be positive and energetic and really looking forward to the future. For the most part now, there’s uncertainty, sort of pessimism. The biggest issue is the uncertainty about what the future is going to hold.”

Sanchez-Medina, whose work as a partner at Sanchez-Medina, Gonzalez, Quesada, Lage, Gomez & Machado in Coral Gables includes transactions and loans, said it didn’t help that South Florida had to backtrack on reopenings in June when cases spiked.

“One minute, restaurants are open. The next minute they are not,” he said. “All the uncertainty, all the ambiguity is adding fodder to the issues.”

Miami-Dade County allowed restaurants to reopen in June at 50% capacity, only to quickly backtrack by closing indoor dining.

Hotels in Miami-Dade, Broward and Palm Beach counties experienced the biggest drop in real estate sales — with the highest drop of 75% for small hotels with fewer than 50 rooms — in the first half of the year compared with the same time last year, according to CBRE Group Inc. data. Deals for hotels with over 50 keys fell 69%, followed by retail and office tied at a 54% drop.

Multifamily and industrial fared a bit better but weren’t spared. There was a 15% drop in industrial transaction dollars and a nearly 30% drop in deals for more than 50-unit apartment properties. Apartment buildings with fewer than 50 units experienced the least impact with only a 3% decline.

Deal evaporation reflects a reluctance to embark on investments by buyers, sellers and lenders.

“Any time there is uncertainty in the market, investors want to pause and understand what they think the short- and long-term repercussions may be,” JLL senior managing director and Miami office co-head Danny Finkle said, referring to buyers and lenders. “Lenders are continuing to lend money, but they are certainly being more cautious.”

Miami attorney Martha Rabbitt, whose work includes business and commercial real estate financing for lenders, agreed.

“Lenders are being cautious,” said the Shutts & Bowen partner. “They are more doing deals for existing clients. Whether they need increases or another transaction, they are sticking with whom they know. Not to say they wouldn’t do a new deal, but it would have to be a tied-up-in-a-bow type of deal.”

This means retail offerings must have a grocery store, which stayed open through the pandemic, and multifamily properties must have seen healthy occupancy and rent collections since March. Location also matters with clients especially cautious about Miami-Dade since it has the highest number of virus cases in the state.

Chris Lee, a CBRE vice chairman in Miami, said even those who are lending are issuing stricter debt terms, increasing interest rates and decreasing loan-to-value ratios to limit their exposure.

“Amortization schedules are less favorable as well. Overall debt terms today are inferior to what they were pre-COVID,” Lee said.

The recession and pandemic-driven uncertainty are causing distress and depressing market values, especially in highly impacted sectors such as hotels and retail. This makes sellers reluctant to dispose of their holdings for less than what they could expect pre-pandemic.

“Any seller would rather hold on and wait than sell in a semi-distressed situation,” Sanchez-Medina said. “I don’t think they have any issues waiting until the market picks up a little bit unless there is a situation for whatever reason the pandemic caused them to sell quickly.”

By the Numbers

Seven hotels with 50 keys or more sold in the first half of the year at a combined value of $324 million, down from over $1.02 billion in 13 deals for the same time last year, according to the CBRE data. Eight hotels with fewer than 50 keys sold for a combined $14.5 million, down from $58.8 million in 15 deals a year before.

Despite massive closures of nonessential stores and restaurants, retail boasted the biggest transaction volume in this year’s first half of any sector at $405 million in 105 deals, down from $897 million in 139 deals in last year’s first half.

Office transactions reached $215 million in 16 deals in this year’s first half, down from $468 million in 32 deals in last year’s first half.

Offices are largely deserted from the shelter-at-home switch, and the question remains whether companies will renew long-term leases at the same size now that they see employees can work from home.

The consensus is companies want an office post-pandemic, but the workspace will be different. Downtown tenants would be more willing to keep their existing footprint but have fewer employees so they can be spaced out while other staff members work from satellite offices or home.

More than 50-unit apartment properties reached $754 million in transaction value in 16 deals in this year’s first half, down from over $1.07 billion in 29 deals in the first half of last year. Smaller apartment properties reached $229.3 million in volume across 93 deals in this year’s first half, down from $237.2 million across 109 deals in last year’s first half.

Industrial sales totaled $477 million in 96 transactions in this year’s first half, down from $563 million in 120 transactions in last year’s first half.

The impact on industrial real estate should be mixed with warehouses catering to struggling industries such as hotels, convention centers and cruises facing distress. On the other hand, COVID-19 caused an e-commerce boom with millions of consumers switching to online groceries purchases. This has created the need for more cold storage and last-mile fulfillment centers, boding well for industrial investment deals.

The CBRE data excluded portfolio transactions and is limited to industrial deals at more than 10,000 square feet, offices at more than 30,000 square feet and retail at more than 5,000 square feet.

Anomalies

The biggest South Florida transaction of the year was California-based Northwood Investors’ purchase of the Two and Three Brickell City Centre office towers for $163 million in late July. Hong Kong-based developer Swire Properties Inc. sold Two Brickell City Centre for $80.3 million and Three Brickell City Centre for $82.7 million.

Swire president Kieran Bowers said in an email that Swire offered the offices for sale last December and will reinvest the proceeds into other projects, including Brickell City Centre. The company didn’t say whether the sale price was lower than what it would have been without a pandemic.

“There was an underlying profit resulting from this transaction. We are a long-term investor with an exceptional balance sheet,” Bowers said. “This enables us to be patient, align investment capital with our broader vision at valuations reflecting a premier mixed-use development.”

Northwood didn’t return a request for comment by deadline.

The runner-up deal so far this year is the $90 million purchase of the Hamilton on the Bay apartment tower in Miami’s trendy Edgewater neighborhood in late July. Denver-based Aimco, one of the biggest U.S. multifamily investors, bought the tower from the Arison family for $81 million. Aimco also bought two lots across the street from the Arisons for $8.64 million.

The Brickell City Centre office and Hamilton on the Bay sales closed after this year’s first half and aren’t reflected in CBRE’s half-year data.

Multifamily’s second-biggest transaction was Ontario-based CaraCo Group of Cos.’s nearly $75 million purchase of The Harbor in Coral Springs garden-style apartments from West Palm Beach-based Copperline Partners in late June.

CaraCo contracted to purchase the 310-unit community northwest of Atlantic Boulevard and University Drive before the pandemic was declared in March, said CEO Gennaro DiSanto.

CaraCo still wanted to buy the property and worked out an extension with the seller to gauge the coronavirus impact.

“We were worried about rent collections at The Harbor,” which is 90% occupied, DiSanto said. “It proved to be as we moved into April and May that our collections were fairly consistent with what we had negotiated, which gave us the confidence to move forward with the closing.”

New York Community Bank committed to finance 70% of the purchase price and upheld its commitment once CaraCo closed three months later than expected. The purchase price, which breaks down to $241,860 per unit, didn’t shrink because of the pandemic, DiSanto added.

Next Year

When investment sales will pick up and by how much remains unclear, although the consensus is transactions won’t be comparable to pre-pandemic levels.

Sanchez-Medina said in late August he is working on $5 million worth of South Florida commercial real estate transactions, the busiest he’s been in some time. Overall, there’s a sense the region is on the right side of the curve, although it remains to be seen whether there will be a second wave with schools opening at least remotely.

“That kind of uncertainty, it’s a super dark cloud on all the issues that investors need to overcome,” he said. “I am feeling a little bit more optimistic now.”

JLL’s Finkle said investor optimism is returning, especially in light of residential rent collections not falling as much as initial fears. The National Multifamily Housing Council reported 92% of U.S. apartment households paid their August rent, only 2 percentage points less than last August.

“We do expect transaction levels to rebound, maybe not to pre-COVID levels instantly, but there is certainly a lot of investor interest in South Florida,” Finkle said.

Interest is coming back but don’t expect investment sales to rebound to pre-pandemic rates, cautioned Rabbitt of Shutts & Bowen.

“I don’t think magically Jan. 1, 2021, is going to hit and all is going to be behind us and we are going to be back where we were in January 2020,” she said.

Her workload was heavy once coronavirus started as she was busy closing transactions initiated before the virus. Then she focused on deferral and other loan modification agreements. Once the initial reopening of the economy was allowed in June, her work on new deals picked up, only to slow again when suspended restrictions returned. July and August generally are slow months, but this year they were even quieter.

The fourth quarter and early next year won’t be so much about investment sales but instead will show where the market truly stands after eviction and foreclosure moratoriums are lifted and commercial real estate fundamentals reflect the true vacancy rates across asset classes.

“For instance, in the end of this fourth Q or even the first quarter 2021, I don’t see that there is going to be some large resurgence in commercial real estate deals,” Rabbitt said.