More Browsers Leads to More Buyers

 As we have all adjusted to this most unusual year, several trends have begun to appear.  First of all, people have more time to search on the internet for just about everything.  I've read that they don't buy clothing, but they do seem to want to buy real estate.  And that isn't limited just to residential property for themselves.  We are seeing more hits to our website, more web leads, and more inquiries from outside sites like LoopNet.

That's good news for sellers.  With so many people looking, there will turn out to be more sales.  In fact, one of the ways that we can tell how motivated they are to buy is that they may put in several requests in a row on different types of property, not just on different listings of the same type.  That suggests investment buyers are seriously searching.  With the stock market so volatile, and interest rates so low, that isn't surprising.  

Connecticut is perfectly situated for those kinds of buyers.  Actually, they come from other states as well as our own.  They are looking for places that should do well in any future phases of this pandemics, or other such events.  We are finally getting good press for the way our State behaves, and it's reflected in our area's appeal to out-of-state real estate buyers.  In addition, our positioning for warehouse and distribution is well known, particularly now that Amazon has gotten so big here.

Remember that there are fewer than four months left of this calendar year, and that it's never too early to start a transaction that needs to close before December 31st for tax reasons.  Whether you are a buyer or a seller, it's best to hustle now, and enjoy the fruits of your labor in appreciating property, now or in the future. 

A Perspective on What's Next for Real Estate Investors

By Ethan Coleman, Ninth Square Real Estate Partners

By now every American is aware of the unprecedented public health emergency and economic disruption caused by COVID-19. While we remain in the early stages of both the pandemic and the likely severe recession that will result, we can begin to assess the impact on commercial real estate as we position ourselves to capitalize on potential opportunities. Before doing so, I want to first express my gratitude to those on the frontlines fighting the pandemic and helping the sick. Thank you. I also wish well all those who are affected by the virus either directly or economically. My thoughts are with you. Our primary concerns should be with those who are helping and those who are affected. I work from the comfort of my home, writing about a topic that is clearly secondary. My purpose in writing this is to begin to organize my own thoughts and research in attempt to begin for formulate a plan for future acquisitions. As a real estate investor during these times, it is hard to both react to the problems within one’s existing portfolio and simultaneously begin looking for new opportunities. These two things can feel contradictory. The problems at properties we own are real and immediate, while the potential opportunity in theoretical. I try to compartmentalize the two and not let one affect the other. So what is happening out there and what should a real estate investor do?

Real estate, unlike stocks, does not reprice constantly, so we can’t yet see what is happening with pricing for buildings yet. Deals take many months to source and close; those that close today were deals consummated prior to COVID-19. For this reason, we don’t yet have data from the private real estate market on how pricing has changed. Every broker and investor is trying to figure it out.

We have begun to see the disruption in property operations, though, and this will eventually impact pricing. For example, many retailers are closed and asking for rent relief, hotel revenue has cratered, showings are down for vacancies, and office buildings are empty as workers attempt to work from home. If these impacts are short-lived, pricing may not change much, but if many stores never reopen, renters lose their jobs and can’t pay their rent, and companies that occupy office and warehouse properties begin to go bankrupt as revenues fall, we can expect significant re-pricing for the affected real estate. For now, we can continue to monitor these initial impacts and we can look to the public markets pricing of Real Estate Investment Trusts (REITS) to begin to understand how investors are pricing the underlying real estate assets.

To translate a REIT share price to the value of the underlying real estate, I calculate the market cap and add it to the long-term liabilities, which provides the current cost basis of the underlying real estate portfolio. We then take the REITs representation of Net Operating Income from its 2019 annual report and divide it by the current cost basis to arrive at the current market cap rate for the real estate. We can then compare the current implied cap rate for the REIT’s assets with its recent high to see the change in how the public markets are valuing the real estate. This can provide some insight into how real estate values may change.

Retail

With about three-fourths of Americans in some form of stay-home order, tens of thousands of retail establishments are closed. As of March 23, over 47,000 chain stores in the U.S. had temporarily closed. In addition, thousands of independent retailers have also closed by choice or state mandate. Many of these retailers are asking for rent relief or are simply not going to pay rent in April. Some may never reopen. Retail landlords can likely endure a short-term reduction in rent, but longer-term fundamentals may be impacted by retailers going bankrupt.

Based on my analysis of the change in valuation for Realty Income Corporation, a REIT focused on triple-net retail properties, the value for these properties, long perceived as safe, has fallen by 28%. Retail Opportunity Investment Corp, an owner of grocery-anchored centers on the west coast, is down 33%. Clearly the public markets are pricing in a severe disruption to retail real estate.

Hotel

Without long-term leases, hotels must re-rent their space each day, so any change in performance is realized immediately. According to a March 26 webinar from STR, a hotel data company, for the week ending March 21, revenue per available room (RevPAR) was down 69.5%, the third week in a row of double digit declines and the largest ever in 30 years of data. Corporate demand for meetings is now down to zero and U.S. occupancy is down from 65% to 30%. China’s occupancy fell to 10% during its lock down. As a result of this decline in performance hotel franchisors Marriott and Hilton are down 47% and 39% respectively as of March 27. With this level of revenue deterioration, hotels are going to face distress much faster than other types of real estate. Values for hotels seem the most uncertain.

Multifamily

Jobless claims for the week ending March 21 hit a staggering 3.28 million, more than four times the previous weekly high. Some experts project unemployment to reach 20%. With many of the laid off workers coming from shuttered businesses, such as hospitality, tourism, and restaurants, these layoffs may begin to impact renters’ ability to pay rent, particularly in Class C apartments, often termed as workforce housing, and in areas of the country where the employment base is more heavily skewed toward hospitality and tourism. With Congress set to pass a $2 trillion stimulus package that includes increased incentives to keep workers on the payroll and an additional $600 in weekly unemployment benefits from the federal government, these effects could be somewhat ameliorated, but only for a short period of time. If the retailers, hotels, and other employers don’t re-open and quickly ramp up to their former revenue level, many jobs may be permanently lost, which will in-turn impact apartments.

While this is the most sudden deterioration in labor markets in U.S. history, it will still take some time before multifamily operations are impacted to a level that causes owners to exit voluntarily or under distressed scenarios. The extent of this pain will determine the ultimate impact on pricing. Equity Residential, one of the best-known apartment REITs, has seen the value of its real estate decline by about 24% based on my analysis of its current stock price.
 

Office

Like multifamily, the impact on office properties will be determined by the ultimate level of economic impact resulting from COVID-19. Many office workers are now working from home, which should allow companies to limit the short-term, direct effects of the pandemic. As the impact to the economy works its way through the system, though, office demand is likely to wane as companies are forced to cut costs as business activity declines. This will eventually result in some companies failing to pay rent and impact property revenue. As this plays out some property owners may elect to sell or will be forced to sell, dragging down prices.

Franklin Street Properties, an office REIT focused on properties in the Sun Belt and Mountain West, has seen its underlying real estate decline by 20%, according to my analysis. The market appears to be more confident in future of office properties than retail and hotel. But office carries the risk of a faster shift towards work from home as more companies have been forced to adapt to this during the stay-at-home orders.
 

Warehouse

Warehouse appears to be best positioned to weather a recession as vacancy rates are low and demand for logistics and e-commerce has been strong. With more people forced to stay home, e-commerce companies, such as Amazon, are increasing their hiring and look poised to increase their market share. But as overall demand in the economy goes down and consumer spending declines, companies operating warehouses are going to declining sales. Some companies will be well-positioned but others will be unable to pay rent, impacting operations and eventually property pricing. Even ProLogis, a class-A warehouse REIT, has seen its implied real estate values decline by 19% as the public markets anticipate impacts on warehouse properties, according to my analysis.

Conclusion

With property operations quickly deteriorating at retail and hotel properties and future reductions in occupancy and rental revenue likely for multifamily, office, and warehouse, it is not surprising that the public markets have devalued real estate by 20-30% depending on the asset class and location. Real estate investors must be careful as they move through this uncertain environment. Sellers are likely to continue to insist on pre-COVID pricing until they are motivated by or forced by deteriorating operating income. As a result, some firms have put new acquisitions on hold as they wait for the impacts to be reflected in pricing. Every person who is interested in investing in real estate should see this as a time of caution, but one that should eventually give way to opportunity, just as was the case in the Great Recession over ten years ago. The investors that are active coming out of the recession will be those positioned to provide market leading returns.

Letter to Our Clients

Colleagues and Friends:

As many have said, these are extraordinary times. As you know, Connecticut Governor Ned Lamont has issued an Executive Order asking many businesses and organizations to suspend operations, while we battle the Coronavirus outbreak that has disrupted our health and our lives.

As of now, real estate services are exempt from the order to close due to the fact that for some people, moving may be a necessity even in this stressful environment. Some businesses critically need more space to provide for increased demand in certain industries. There are many in our community right now who are in the middle of a real estate transaction, or who find themselves needing to purchase or sell a property due to changes in their jobs or their families.

While we remain available to those who need us during this time, the Governor's order was put in place for a reason, and we are doing everything we can to respect and honor it. That means that at Pearce Real Estate, our primary concern is for the health, safety, and welfare of everyone in our community that is affected, in whatever way, by the current crisis. So, while we are still able to serve you, we will be strongly recommending doing so virtually. When in-person contact is required, we will be sure to do so safely and appropriately to respect the circumstances.

During this time, we feel one of our primary responsibilities is to listen; whether it's about a specific housing need you may have, or just about how this situation is affecting you and your family. Even if you’re not someone who needs to move right now, you may have questions. Please know that we are here to help you make the best possible decisions for your specific situation and help you safely through the process.

We will continue to communicate information we believe to be important to you as circumstances evolve. In the meantime, don't hesitate to contact us.

Thank you for the trust you have placed in us, and we intend to do everything we can to live up to it.

Together we'll get through this.

Barbara L. Pearce

CEO & Chair
Pearce Real Estate

Coronavirus and Commercial Real Estate

There are no crystal plans, and almost no precedents, to give us guidance about what to expect in the weeks and months ahead.  We still have clients looking, clients buying, and there are also some clients pulling out.  Uncertainty is always tough for people, and now it's through the roof.  One buyer felt that his business had already been so impacted that, although he still wanted and needed the new building, he was afraid to commit.  The losses in the market have multiplied that problem.

On the other hand, everything I am reading about crisis management says that good leaders plan ahead for what will, and what might, take place.  If you consider both the best and the worst cases, you usually end up right in the middle.  People who take action sooner than others, whether it's pulling back or charging ahead, are most often the ones who garner the greatest profit.  It's that vision that keeps some buyers marching forward, and they will attract followers, if they move confidently.

That doesn't mean that it is a good idea to stockpile hand sanitizer, as one greedy entrepreneur did last week, but it does mean that, if you play the odds after careful weighing of the pros and cons of doing so, you still may come down on the side of thinking about life after COVID-19.  Governmental aid is going to remain at probably an all-time high, and interest rates should stay at an all-time low.  Doing the bold thing with the right circumstances, and a little luck, can have a great payoff.  The big advantage of betting on real estate is that it's tangible. What you have at the end of the day can't go away, even if it might not be as liquid as most stocks.  Between the market, and what we can foresee will be great pent-up demand for goods and services when the immediate crisis has passed, it may be that staying in the game is the right action to take.

Every day brings changes, so advice is particularly transitory these days.  However, if you do decide that you'd like to take the plunge, we're here to guide and advise you.

We're at the Witching Season

It's not only Halloween next week, it's the best time to buy property.  Sellers who are ready to move on, and who may have maintenance costs on empty buildings, or tax consequences if they don't close by the end of the year, are at their most reasonable.  Buyers may have their own deadlines, and the end of the calendar year provides a natural one for most.  With motivated parties on both sides, we often find that sales come together more quickly at this time of year.  Even bankers and other professionals have reasons to want to move the process along without delays. 

Buyers should use this scenario to push for a good result, especially by offering to close quickly.  If you haven't bought or sold real estate recently, you may find the experience more like waterboarding than like waterskiing, so be sure to answer all calls and requests for documents right away.  Don't think that people will back down on requirements--many times they have no control over certain items. 

Sellers need to heed the same advice--you are not in control here, and that may be hard to stomach.  Just gird yourself for some bumps in the road, and think forward to the holiday season, and the nice vacation you'll be able to take when you've gotten through the closing.  Remember that the buyer may not be driving the bus, either, and don't assume that s/he is trying to take advantage of you.  See the above comments and think about your own buying history, especially if you have borrowed money in the past ten years or so. 

I'm presenting the worst case here, and often it can be much smoother.  Whether it is or it isn't, almost everyone is happy in the end that they got through it, and that the property changed hands.  Keep that end goal in mind, and get serious about property transfer in the last quarter of the year.  You'll be glad that you did.

The First Two Weeks

There seems to be a persistent practice in real estate of "testing the market" with a price higher than what the agent believes that the property will bring at closing.  Sometimes there is an agreement that the price will be lowered after some stated period, often thirty days.  Agents often feel that sellers become wedded, however, to the original listing price, and forget completely that they were told that a lower price would be more in line with market expectations.

While testing the market might seem like a reasonable course of action, especially if there is a clear understanding up front that the price will be lowered in x days if not enough action, or an offer, is generated, those of us in the industry should know better. We now have access to all kinds of information that tells us who looks at a listing, when they search, and how (with what device).  We know popular hours, phrasing that captures attention, and click-through rates by property.  We can see whether they looked at it, saved it, forwarded it, or contacted us about it.  Administrators like me get a copy of every email inquiry sent to an agent on certain search engines and platforms.

And what do we know from all of that?  We know the power of the new.  Overwhelmingly, the greatest interest in a property comes in the first two weeks after it gets listed, whether it is commercial or residential, and no matter the price or location.  Some properties clearly generate more activity than others, but always get the most attention early.  Sometimes that is because prospective buyers have signed up for notification alerts, so that a new listing will show up in their emails.  Many times it is because the buyers themselves look on a regular basis, and click on anything that they haven't seen before.  The end result is the same:  They gravitate toward the newest entries.

So it's easy to see the problem with testing the market.  Your property gets the most exposure and the greatest number of views at the original price, which is higher than the agent, and perhaps even the seller, thinks is the true selling price.  Agents often talk about how much higher the likelihood is of securing a buyer in the first two weeks after the listing comes onto the market, but, in order to secure the listing, they also often sabotage that chance, by using the most useful marketing time to expose the property at the wrong price.

We know that buyers today know a lot, and often as much as agents or sellers, about the value of properties, through comparisons of available inventory, and market knowledge gained online and elsewhere.  They aren't going to overpay, and many aren't going to potentially waste their time making offers that will be refused.  They concentrate instead on properties that are listed at compelling prices, which suggest that they will sell quickly.  That motivates buyers to make speedy offers, at prices near, at, or above the listing price, especially if they see that there is a lot of activity at open houses, or with showings.  It's better to accept the reality that buyers know value, than to think that serving up higher-priced listings will change their minds about the correct price.

If there is one takeaway from this, it should be that sellers need to ask agents this question:  What price do you believe that my property will close for in the end?  Then list as close to that number as possible.  And enjoy the attention your property will receive.

Never Too Soon to Think about Taxes

We are clearly in the dog days of summer, and many people are just sitting by pools, beaches, or air conditioners, but fall is just around the corner.  And what comes after fall?  The end of the year, and always faster than we think it will arrive.

If  you are a buyer or seller of commercial real estate, it makes sense to start end-of-year tax planning now. We don't know everything yet about the new tax act, but we know some things, and we know provisions that haven't changed.  In addition, any change in your circumstances, life choices, or tax status can cause you to need to plan for the future with an eye toward minimizing tax consequences.

One of the cardinal rules of transferring real estate is that it almost always takes longer than you think it will.  Hence, my mid-summer plea to think ahead.  Why rush in December, when you can get a jump on the end of the year by starting now?  Even if you want your property to go onto the broader market after Labor Day, the process of getting things set to list, taking good pictures, filling out forms, and tracking down signatures can be lengthy.  Vacations and back to school duties can also cause slowdowns.

Don't miss the fall bump in the market by beginning too late.  Call us today to take advantage of the time left before everyone packs up their picnic baskets and heads back to work!

We're Turning 60!

This week is Pearce Real Estate's 60th anniversary, and we're celebrating!  My father founded the company in 1958, after a 20-plus year career at the A.C. Gilbert toy company (now turned into artists' studios on Peck Street in New Haven).  Perhaps selling erector sets made him long to sell real buildings, and, early in his career, he actually sold the Gilbert building, after the company was downsized and sold.

Our original location, on State Street in North Haven, has been doubled twice, and we are still headquartered in that building today.  Over the years, we spread our territory, first to the Shoreline, and then to other commercial locations in Greater Hartford and in Milford, but we always have maintained our core principles of local independent real estate expertise and community service.  All eight offices today are filled with dedicated professionals who pride themselves on knowledge and integrity.

We'd like to think that we have indeed made Connecticut better over our 60 years in business.  In addition to providing thousands of hours of human service, and millions of dollars, to all kinds of non-profit organizations around the State, we have changed its landscape.  We have developed housing around the Greater New Haven region for most of that period.  With Don Lippincott, my father developed first an industrial park at Exit 10, and then what became in effect a regional mall at Exit 9.  The latter involved building a road and bridge, which is now called the Herbert H. Pearce and Donald B. Lippincott Commemorative Bridge, and leads to Home Depot, Target, and many other destinations.

His capstone project was New Haven's first mixed-use development, known as Whitney Grove Square.  It has shopping, office, residential, and parking at one location, with a bigger garage across the street. It was instrumental in moving people up from the Green to Whitney Avenue and Grove Street.  Buyers lined up through the night to buy the condos when they went on sale in 1986.  Many residents of the region now live in the heart of downtown New Haven, but it was unusual at the time.

We're proud of history, and of the perseverance that it has taken to survive and thrive for all of those 60 years.  We're prouder still of our associates, current and retired, who allowed us to do so.  And we are grateful most of all to the thousands of clients who have entrusted us with their sales, purchases, and rentals, for decades, and often for generations of the same families and corporations.  We look forward to the future, and know that it will be bright.

Finding What's Not There

Usually, when you are looking for something to purchase, you expect to choose from among the options available, either at a retail outlet, or on line.  Real estate has become very different these days.  There is often a disconnect between what sellers are offering, and what buyers want to buy.  And that's where the agents come in.


In the olden days, we sat down with people, and showed them a physical book of properties available, or took them in our cars to see what was listed.  Now, we've become experts in finding what is not on the market.  We frequently scour an area, or brainstorm together at an office meeting, to try and locate what a buyer or renter is hoping to find.  It's not uncommon for us to chase down leads, or contact out-of-town owners upon seeing a half-empty parking lot or signs of disuse, in order to present more choices to clients. 


That's where the distinct advantage of a local company comes in.  We are big enough to network all over the world, to promote listings on line, and to have the technology necessary to accomplish transactions.  However, because we know Connecticut, and have our whole team of local experts, we can search with purpose, having a good idea of where things not on the market currently may be located, or carved out of a larger property.  In one recent search, only a couple out of almost 20 properties were being marketed for sale or lease.  The others came through networking with owners, agents, State and town officials, and each other.


That's the future of real estate brokerage--agents as consultants--and we are in the vanguard.  We advise people who have found buildings and land, people who are looking, and people who haven't looked.  We seek out alternatives, identify and sometimes eliminate obstacles, and smooth the way with regulations.  It's the best way for us to work--as partners with our clients--and the best way to access our services.  Sometimes change really is good for everybody!

Happy Thanksgiving

It's the time of year to count our blessings, and that makes us think of our many clients.  We deeply appreciate your patronage, your loyalty, and your belief in our region's economy.  As CEO, I am also grateful for our many accomplished agents, who are so dedicated and professional, and make us proud in every season of the year.  I also feel lucky to work with such a fine support staff, who always go above and beyond for both clients and agents. 


So, among my many Thanksgiving expressions of gratitude, I will be naming you all, and wishing for you all a happy, healthy, and peaceful holiday season.

Current Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for Middletown you can say “If market conditions do not change and if no new listings come on the market it will take 7.4 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5 – 7 months.”

State Tax Policy

There was a summit yesterday, at the Great River Golf Club in Milford, bringing together many of the best minds in the CT commercial real estate field.  Sponsored by CCIM, it was an entire morning devoted to the current state of the State, from a real estate point of view.  Pearce Commercial was ably represented by Carl Russell, who presented an overview of rental rates, availability, and absorption rates in each of the major submarkets.

The sharpest debate of the day involved an assertion by the keynote speaker from Texas, that CT tax policy was so unfriendly toward business that our State was, and would continue to be, underperforming on a value and desirability basis.  This was later challenged by Catherine Smith, the Commissioner of the Department of Economic Development, who went through what Connecticut is doing to be business-friendly, and to recruit and retain jobs.

 There were two problems with her counterpoints.  One was that she gave answers about what the State is doing, but didn't actually debate the ranking on Connecticut's business and tax parameters (which is pretty hard to dispute, since they are national rankings based on specific criteria, and are well-publicized).  Maybe her programs will change our relative position someday, but not right away.

The other problem is that she, and he, concentrated largely on corporate feelings about doing business in Connecticut, and policies toward business.  The biggest issues now may well be those of personal tax policy, such as the estate tax, the high income and sales taxes, and the lack of deductions available on the personal income tax.  As I learned long ago in business school, corporations go where their CEOs want to live.  If they are fleeing Connecticut, they will take the jobs of others with them.  Without jobs, we cannot prosper.  If one factor other than where they themselves wish to be would influence them, it would probably be the ability to attract key talent.  If other employees refuse to move here due to taxes and perception about the future stability of State growth (and there is some evidence in the relocation field that this is becoming true), they may move to where their recruits want to be.  And, right now, that wouldn't be here.

So, get on the stick, Connecticut!  Stop passing taxes that citizens hate, and do what you've needed to do all along--control union and public sector demands, and balance the budget.

Great News! We're Growing!

Yesterday, we added a new Milford office, with very successful and seasoned commercial agents in it, as we  completed a merger with George J. Smith & Son Realtors.  The Smith firm, which has been in existence for 126 years, adds to the 54 years of Pearce Real Estate to give clients the benefit of a total of 180 years of company operations.

After the past several years of doing little other than cutting and closing, it's wonderful to be able to grow, and to look forward with anticipation to better tomorrows.  There are now 16 of us in the Pearce Commercial Division, a number that exceeds almost all of the other firms in Connecticut, including the national firms.  Our combined size positions us to obtain more and better listings, have broader contacts, and share valuable information from our office in Rocky Hill, our headquarters in North Haven, and our new office in Milford.

We look forward to serving you in one of our locations!

Commercial Real Estate Loans Coming Due

2012 marks the year when many, many commercial real estate loans, written at the craziest height of the market, are coming due or need adjustment.  Although there has long been talk that such an event would cause huge disruptions in the market, the economy seems to have improved enough to allay those fears somewhat.  However, there are definitely loans out there that should never have been written.

Today's New York Times cites one such loan, that made wild assumptions about the increases in NYC rents, the ability of an owner to do condo conversions, and the lack of any increases in operating costs.  Viewed through the lens of the past five years, all that comes to mind is "What were you thinking?".  But isn't that always the way the cycles go?  It does often seem that the life cycle of a banker is just slightly shorter than an economic cycle, so that we are always repeating the same mistakes.