Podcast

How Lenders Think About Commercial Real Estate in the Pandemic

2Q20

With hotel and retail properties suffering, the role of real estate lenders is more important than ever.

Read The Transcript

Todd Friedenberg of Q10 Vista Commercial Mortgage Group shares what he is seeing in the commercial real estate space as a national lender. He shares his thoughts on where the retail, hotel, and multifamily industries are headed as lenders try to adapt and face a new normal. 

 

Key Insights:

  • When commercial real estate is closed and many tenants are unable to pay their rent, this puts an extreme strain on real estate owners, who have started to ask lenders for some form of relief.
  • It’s unlikely we’ll see a large number of foreclosures as lenders have every incentive to find a way to work with their borrowers.
  • Multifamily properties currently have some backing from the government on both sides (tenants and landlord), which means things are a little more stable compared to the hotel or retail asset classes.
  • How are lenders changing the way they underwrite deals in the current environment?
  • Todd shares his thoughts on how the pandemic will shape the structure of retail leases.
  • Todd is optimistic overall on the real estate landscape. The fundamentals are still here, it’s just a question of getting back to normal.
  • Will we see an increase in distressed investing in asset classes outside of hotel or retail? Probably not, but Todd believes investors will start to get creative with their deal structures.
  • Given general economic uncertain and a low-interest rate environment, property valuation is more challenging than ever

 

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Guest Bio

TODD S. FRIEDENBERG is President and a principal of Q10|Vista Commercial Mortgage Group and has over 30 years of commercial real estate experience in debt & equity financing, brokerage and valuation consulting. Mr. Friedenberg was previously a Vice-President with GE Commercial Finance and Column Financial (Credit-Suisse), and served as a commercial mortgage banker since 1990 with various firms in Nashville.Friedenberg has originated more than $1 billion of debt and equity over his career.

Todd Friedenberg is a graduate of Indiana University and received a B.S. in Business majoring in Finance and Real Estate Administration. Mr. Friedenberg is a Certified Commercial Investment Member (CCIM) with the Commercial Investment Real Estate Institute and is a Tennessee Certified General Appraiser and holds a Tennessee Affiliate Brokers License. Mr. Friedenberg is involved with several Nashville area Non-profit organizations and currently serves as Board Chairman of Samaritan Recovery Community and as a close advisor to Alpha Investing, serving as our VP of Commercial Real Estate.

Resources:

Real Wealth Real Health

Alpha Investing

[email protected]

Q10capital.com

Todd on LinkedIn

Content.naic.org

Podcast Transcript

Speaker 1:

Welcome to Real Wealth Real Health, the show that empowers you with insights, information, and inspiration to achieve your version of financial wellness, learn how to balance living a full life today with planning for the future. This podcast is brought to you by Alpha Investing, a real estate-centric private capital network that provides exclusive investment opportunities to its members. And, now, here are your hosts, AdaPia d’Errico and Danial Cocca.

AdaPia d’Errico:

Hello and welcome back to another episode of Real Wealth Real Health. Today, we’re speaking with Todd Friedenberg. Todd is president and a principal of Q10 Vista Commercial Mortgage Group, and he has over 30 years of commercial real estate experience in debt and equity financing, brokerage, and valuation consulting. Todd was previously a vice president with GE Commercial Finance and Column Financial of Credit Swiss, and served as a commercial mortgage banker since 1990 with various firms in Nashville. He has originated more than a billion dollars of debt and equity over his career.

AdaPia d’Errico:

Today, amongst other things, Todd’s involved with several Nashville area non-profit organizations and currently serves as board chairman of Samaritan Recovery Community, and he is a close advisor to Alpha Investing, serving as our VP of Commercial Real Estate. We talk with Todd about the current state of the debt markets and how the pandemic is affecting retail, hotel, office, and multifamily assets. Covering the ways that lenders are adjusting underwriting and working with existing borrowers, from big-box retailers who refuse to pay rent, to multifamily owners who are managing uncertain rent roles. We also speak about what could be on the horizon, should the pandemic timeline extend into a long-term crisis, as well as covering some creative solutions for some assets in asset classes that will be irrevocably changed by this health crisis.

AdaPia d’Errico:

On a daily basis, you’re working with all kinds of lenders and that is the fundamental nature of what you do, right?

Todd Friedenberg:

Correct.

AdaPia d’Errico:

Okay. On a daily basis today, maybe compared to even six or eight weeks ago, what is going on?

Todd Friedenberg:

Yeah, it’s pretty crazy. Even if I compare today versus yesterday, that’s how quickly things are changing. I can give you some specific examples, but I live predominantly in the life insurance company arena of lending, and so probably 80% of the lenders that I’m dealing with are life companies that I’m originating commercial mortgages for their portfolios. They are under a completely different set of guidelines and requirements than a bank would be, for example, so the insurance companies are regulated by individual state, but the NAIC, which is the National Association of Insurance Commissioners, is their guiding entity. We’re still waiting for the NAIC to formally put out a set of guidelines that insurance companies can abide by in terms of modifying their loans.

Todd Friedenberg:

The way it stands now is if a borrower makes a request for forbearance, meaning stop payments for one to three months, or interest-only payments, the life company is required to set aside reserve money, actual cash dollars against their balance sheet, to reserve against potential losses on that loan. And so that’s been the big issue because we don’t know what the NAIC is going to do in terms of alleviating some of that risk-based reserve capital that the life companies are required to set aside. There’s been some guidelines and suggestions to say, “Anything short-term, we’re going to look favorably upon and not require that,” but there’s been, again, no formal document saying that.

Todd Friedenberg:

So what we’re seeing now, and I’ll maybe give you some specific examples, I have a client that owns a large strip shopping center with big-box tenants, Bed Bath & Beyond, TJ Maxx, Staples, a sporting goods store, along with several restaurants, and then some local mom-and-pop-type shops. The center is completely closed, every store is closed, there’s really no essential businesses operating out of this center, so they’re required to be closed, so there’s no income at all at the property. The large tenants, the big-box tenants, Bed Bath & Beyond, TJ Maxx, they are all, on a nation-wide basis, taking the attitude of “We’re just not paying rent.”

Todd Friedenberg:

Some of them are saying, “Hey, the lease requires the property to be open and operating and it’s not, so we don’t have to pay rent,” or they’re looking to specific clauses in the lease, like force majeure, which I don’t want to get too much into that, but that allows, under certain circumstances, the tenant to not abide by all of the lease terms. So it’s put the owners in a real crunch, so they’re coming back to the lender to ask for some relief. And so I’m getting a lot of requests for a certain number of months of interest-only payments or a certain number of months of forbearance, meaning we can’t make a payment for three months until these tenants reopen and start paying.

Todd Friedenberg:

So, from the life company side, they’re pushing back a little bit, saying, “Look, on this one particular property, it’s like a 40% loan-to-value, this property was cash-flowing millions while it was open, now it’s cash-flowing nothing,” but the life companies are taking a little different approach because they don’t have the flexibility that a bank would have, or the federal government, giving them the ability to work some of these deals out without really a cost to the bank. So, we’re kind of caught in the middle of all that, trying to navigate those territories. And, honestly, I probably have, in our servicing portfolio, really only a handful of loans, so far, where the borrower has asked for some help, but I know, on a nation-wide basis, that number is growing.

Todd Friedenberg:

And so I think we’re fortunate where we’re located in Nashville and in the Southeast, and I’m not sure why that is, I think a lot of our loans are structured where they’re not highly leverage loans. So it’s going to get a whole lot worse before it gets better, but I don’t foresee a large amount of foreclosures, at least not on the life insurance company side.

Daniel Cocca:

So I think that’s the key question, right, what people are wondering: will there be foreclosures, given this dynamic? And if we move beyond life companies in the Southeast and just talk about this more broadly, how do you personally feel about the situation? Is it likely that a bank says, “Well, we underwrite risk, and even though we didn’t account for this pandemic, it’s still our right as the first lien lender on one of these properties to foreclose if we want to”? There are obviously practical challenges that come with that, are we going to kick out all of these big-box retailers and find new ones in the current environment? Absolutely not. And so there’s a bit of a practical discussion to this as well, as opposed to just what are your rights per the legal agreement that is a lease. And so we’d just like to hear some of your thoughts on that dynamic and how you think this will actually play out in practice.

Todd Friedenberg:

Well, it’s a great question. I think that there’s a lot of ways to break that down. I think, one, if we’re specifically talking about … let’s talk about some classes of properties: retail and hotels are probably the two hardest hit by this pandemic and store closures. From the retail standpoint, what’s interesting about this is retail, in general, has not been a favored product, just because of Amazon and the internet and just in general these big-box retailers, I think, this was probably coming down the pipe, whether it was a year from now or five years from now, so this event really accelerated that. So I think the retail side of commercial real estate, that landscape is going to really change, going forward.

Todd Friedenberg:

And I’m not really sure who’s in the driver seat, I think we’re going to find, in a lot of cases, the tenants are going to be in the driver seat because they can really squeeze the landlord. But I have a couple of borrowers that told me, “When we get through this, we don’t want to work with these big-box retailers anymore because of the way they’ve treated us, and so we’re going to try to re-tenant this, we’re not going to renew their lease.” So I think that group is probably in the minority. But in terms of foreclosures, on the life company side, I don’t think we’re going to see a lot of that, I think that these deals will get worked out and restructured.

Todd Friedenberg:

What’s really interesting, the paradox here is: in the 2009 financial crisis, banks were brutal on their borrowers because of the credit crunch and values, real concerns about values, and banks would go out, they were getting properties reappraised, and the property was appraising below where it would provide the required debt-service coverage or other metrics, they were making the borrower pay down a loan amount by that difference, and so they were really squeezing the borrowers. This time around, they’ve got the backing of the federal government right from the get-go. And loans today look a whole lot different, bank loans, than they did 10 years ago, they’re not as highly leveraged, they’re structured a little differently; and bank loans, most of them have recoursed, so they’ve got a little more flexibility.

Todd Friedenberg:

And so I don’t think we’re going to see a ton of that, aside from some retail properties and hotel properties. I’m not sure how we get around, certainly, the hotel properties. I mean, look, we’ve got all these hotels that are basically closed, and nobody knows when they’re going to reopen, and even if they reopen in a couple months, I don’t think they’re going to fill up for a while because we’re not going to see conferences come right back and we’re not going to see travel as much, and so it could be 2021 ’til we really get back to our normal environment, from a standpoint of hotels. I’m not so sure what retail looks like.

Todd Friedenberg:

Multifamily properties, again, I think you’ve got some backing from the government on both sides, the tenants that are receiving some money, if they applied for it, a lot of that money’s running out, but stimulus checks, things like that; and then on the landlord side, same thing, if they had a government loan, like a Fannie Mae or Freddie Mac, they’ve got some relief on those loan requirements and some forbearance relief. So, I think it’s going to be really a few months before we really know, before I can answer that question. If you ask me that question in three months, I think my answer’s going to be a lot different, depending on what we see over the next three months. So, I don’t really know, Dan, I’m hearing a lot of different things.

Todd Friedenberg:

I’ve been through a lot of downturns, I’ve been in this business for 33 years, and usually you have a majority idea of which way this is heading. I’m hearing so many different things right now that it’s really anybody’s guess as to where we go from here, and we’re really not going to know until things get going again.

AdaPia d’Errico:

Yeah, I was reading somewhere, and of course everybody’s got best guesses and there’s articles about everything, but there was an expectation that travel wouldn’t really normalize or really pick up for about 30 months was the last thing that I saw, and I think it was specifically related to airlines, potentially international travel, there might be some expectation of local travel, but to your point about hotels and the travel industry in general.

AdaPia d’Errico:

I was also thinking about, speaking about hotels, I’m in LA, as you know, and I saw that, in San Francisco, there was an ordinance passed for the city to rent 7,000 hotel rooms for the homeless population, which I thought was really interesting, and it was unanimously voted, and I can’t remember what housing board voted this in for the homeless population.

AdaPia d’Errico:

And then we’ve seen hotels maybe also being used for different kinds of shelter-in-place for people who are ill. There’s a lot of different options for that. Of course, that varies across the country. There has been suggestions that student housing dorms be used for spare hospital beds. I mean there’s got to be some creative solutions to these issues, which will be interesting to see how that plays out.

Todd Friedenberg:

Yeah, I think you’re right. I think that we will see a lot of creative short-term adaptive reuses of hotel properties for a lot of different … I love that idea about sheltering the homeless and figuring out how to compensate the hotel owner so they can continue to make their loan payments. It’s really a pretty huge trickle-down effect here because there’s so many different parties involved, lender to the borrower. What’s interesting is: the one property that I was describing earlier, the retail property, is actually owned by a primary borrower owns a chain of movie theaters, so his argument is, “Hey, look, my theaters are shut down, I have no source of income there,” and then he owns retail real estate and there’s no income there, and so he’s really getting squeezed in every direction, and I don’t see how a lender won’t work out a solution with him, and I really think they will. We haven’t heard back yet, but we probably will in the next couple of days.

Todd Friedenberg:

And I think, really, the solution is just going to be an interest-only payment structure or maybe three to six months until things get up and operating again. But there’s so much equity ahead of him in this property that he’s not going to let it go, no matter what. Now, the flip side to that is: properties that are very, very highly leveraged, those are the ones that are at the highest risk of getting foreclosed on. But most lenders, including banks, they don’t want to foreclose on a property, so they’re going to try to do whatever they can to avoid that, and I would say the majority of lenders are in that category. The one lender category that I’m most concerned about are CMBS loans, which are securitized loans that are highly leveraged.

Todd Friedenberg:

I was on a conference call yesterday with a group that indicated that there was something like 10,000 active CMBS hotel loans in securitized portfolios right now, and they thought that 50% of those loans were going to a special servicer, meaning that there’s major issues with the property that have to get worked out. Normally, in those situations, the cashflow would go into a lockbox, they would sweep that cashflow to pay the debt-service first, but there’s no cashflow, so it’s going to be really interesting to see how all of those deals get resolved.

Daniel Cocca:

It’s really interesting to hear about how lenders are dealing with existing loans that are having these issues. I’m also curious about what you think will happen on a going-forward basis, whether it’s new loans that borrowers are looking to obtain today, and the standards under which these lenders actually underwrite these deals. There’s obviously a lot that we don’t know about even the medium to long-term impact of COVID-19, whether it’s hotel or retail or even multifamily. How are lenders looking at the changing world and incorporating those things into their underwriting for loans today? Our assumption, of course, is that the volume of loan requests has probably decreased month over month, year over year, but they will come back eventually, and how are underwriters changing their standards?

Todd Friedenberg:

It’s too early to really tell right now. I’m working on several loans right now and I’m not seeing a huge difference, with the exception of retail properties. Multifamily properties are still getting done, new multifamily properties that are not stabilized yet, that are still in lease-up, there’s a little bit of caution there, just in terms of what is that going to look like once we get through this, and will they maintain the same flow of leasing prior to the pandemic? So, in general though, interest rates are still really low, historically low, and I think they’re going to stay historically low for quite some time, I’m talking years. I don’t see how they won’t, unless we get some really major inflationary pressure, which I think we will; of course they said that in 2009 and we never really saw that, but I think this is different.

Todd Friedenberg:

Just from a strictly underwriting standpoint, Dan, I think that we’re not going to see a huge difference right now until we, again, know more. Is this going to be a V-shaped recovery? Is it a U-shaped recovery? Are we talking about years from now? The last thing I heard was a W-shaped recovery. So, we’re running out of letters, I think, to describe the potential recovery. But underwriting is going to still maintain the same fundamentals, I think, in terms of debt-service coverage. Leverage might be one thing where you won’t see lenders pushing leverage as much, but interest rates really are going to help that situation as well because we’re still seeing rates, in the permanent market on the life company side, and even on the bank side, below 5% and, on the life company side, we’re low 4’s; in some circumstances, even below that, and I don’t see that changing for quite some time.

Daniel Cocca:

It’s interesting, debt is the largest component of a capital that goes into any of these deals, and you look at some of these harder hit asset classes, whether it’s hotel or retail, and it’s really hard to foresee a world where revenues at those properties get anywhere near they were pre-COVID; in a lot of cases, we’re talking about being cut by a substantial percentage, 50% or more. So I wonder: how does a retail deal get done? How does a hotel deal come together when revenues are projected at 50% of what they were a few months ago? It’s just not possible at those rates for these deals to work.

Todd Friedenberg:

Again, on the retail and hotel front, we’re not going to see a lot of new development there unless there’s some other source of capital to finance that, aside from the traditional banks or life companies or CMBS lenders or even bridge lenders, for the exact reason that you just described because, unless they’ve got tenants that are ready to open and paying rent, I don’t see that happening. I think the whole landscape for that was changing anyway, you’re not seeing the large big-box new retail developments anyway, like we once did, that was slowing down. I think the biggest changes we’re going to see along that front are going to be in the leases, in new leases, because we’re going to have new clauses now because there’s so much gray area behind what a tenant can do in the event of a pandemic because we really haven’t experienced this to this extent before.

Todd Friedenberg:

And so that’s going to change the whole landscape on really every property type, in terms of leases, but predominantly on the retail front. And then hotels, we’re just not going to see new hotels. And the demand is not there, it’s completely gone, and you’ve got all these hotels that have to basically start all over again; all the convention bookings have been canceled, weddings, anything like that, and just destination recreation trips to different cities where you’re going to occupy hotels. So you’re basically gone from the highest level, I mean we saw the highest occupancy levels of hotels that we probably, historically, ever seen, prior to this COVID pandemic, to really the lowest we’ve ever seen. So how do we get back to where we were and will we ever get back? I don’t know. I think we will, but the big question is: how long is it going to take?

AdaPia d’Errico:

Yeah, that’s the thing, right? Even when you were saying, “Is it V-shaped? Is it U-shaped? Is it W-shaped?” There’s a lot of talk about the fact that if we have this virus coming back in waves, until there’s a vaccine and until there’s antibody testing or what have you, we could potentially be doing self-isolation every so often. And if there’s self-isolation every so often, or full shutdowns every so often, and of course all of this is conjecture, but if that were to happen, that’s also going to have an impact. So I think, from an underwriting perspective, which is all about mitigating risk, and life insurance too, trying to predict risk analytically, I think these sort of scenarios, I think, are fascinating; I’m not a statistician, but to take all of that into account when underwriting a deal and cashflow and risk is just next-level of gazing into a crystal ball, but also coming up with what is the right number and what is the risk I’m willing to take?

Todd Friedenberg:

I agree, and I think you really brought up a really important point: until we have better testing and a vaccine really, until there’s a vaccine, I think there’s going to be a huge amount of uncertainty as to when we get back to normal. Once we have a vaccine, then we have a solution, at least for this strain of the Coronavirus, but it’s going to be a huge step in getting back to running a normal economy. And who knows when that is, is it three months from now or is it a year from now? Who knows?

AdaPia d’Errico:

Yeah, it’s hard to say. I’m curious, because we’ve talked about hotel and retail, you mentioned you have some insights potentially on office. I think that is a very interesting area, physical space and also just an area of life that, A, it’s affected, but it’s also going to be one of the ones to come back online probably before retail, but space planning in offices is going to be a thing. Are desks going to be six feet apart? Can you cram all the people in the same area as before, especially a coworking space? I mean there’s really interesting things around rotating workers, over time, working from home and working in the office. I’ve read some really interesting things, it all goes back to we have to be creative about restarting somehow into this new normal. But what are some of the insights from maybe a more technical real estate or lending perspective that you’re seeing in office properties?

Todd Friedenberg:

And, again, I haven’t seen a lot of activity there. I can tell you from a standpoint of our servicing portfolio in our whole Q10 Capital Group across the country, we’re not seeing a huge amount of issues with office properties in terms of requests for forbearings or things like that. In certain properties, certain tenants, like we’re involved in one office building where one of the tenants happens to be a pretty large hotel developer, so he’s asked for some relief from rent because he has no cashflow right now in his hotels. So, certain circumstances like that, you’re going to see that happen. But, overall, I think the office market is still pretty healthy.

Todd Friedenberg:

You bring up a couple of really interesting points though: coworking spaces, what is that going to look like going forward and are they going to have to spread out? And the same thing, there’s been this movement in office space in general for larger open coworking-type spaces, and will that trend continue or will we see something move back towards separate offices where you can actually close your door and be somewhat protected? I’m not sure. And then does that really make a difference if you’re in an office space with air circulating throughout the whole space? Does that make a difference? And nobody really has the answer to that yet and how this will spread, in terms of a virus spreading through an office environment.

AdaPia d’Errico:

Yeah, or those plexiglass dividers that I see going up in grocery stores, for example, they’re starting to have plexiglass or, in Asia, they have plexiglass on larger eating tables in food halls where people can still sit and eat, but there’s this plexiglass situation going on. But it’s interesting to think about how we adapt to an environment where we can’t have the same kind of density as before, and this idea of rotating working-from-home a little bit, like one group works from home while the other group works in the office, and vice versa, there’s so much. Also, contactless, I’ve been reading a lot about companies, property owners trying to as much as they can with contactless technology and just adding a lot more technology to take out a bit of a human element. Have you seen any of that, or is that anything that you think plays a role in risk mitigation or just looking at the way a property positions itself to work with people in this new normal?

Todd Friedenberg:

Well, I haven’t seen it yet, but I think that those are questions that are going to get asked by a lender to a borrower on how they propose to deal with all this, and it is all new, but I think it does factor into the underwriting, even though it’s not monetarily have a direct effect on the underwriting, it could have an effect on the operation of the property overall and the success of a property. So, I think we’re going to see those questions asked more often than not, and I think people are just navigating this whole new territory of dealing with issues like this because we’ve never seen anything like this to this extent before. So, they’re all good questions, AdaPia, I just don’t know how they’re going to be received.

Todd Friedenberg:

And, today, I’m not seeing a huge shift in underwriting on properties, and lenders are still lending, still looking at deals, but that doesn’t mean, in two weeks, that we’re going to see a sudden shift. So, we’ll have to revisit that if that’s the case and see how that matches up to what we talked about today because who knows what could be coming down the road? I mean I’m optimistic overall, in terms of the real estate landscape. I think when people get out again and the economy starts rolling again, the fundamentals are still there, I think, it’s just getting everything started again is going to take some time, but I think there’s still opportunities, I think there’s still room for growth in a lot of places, especially in the multifamily front, as long as jobs come back.

Todd Friedenberg:

Those are probably the three big property types, the retail, hotel, and multifamily, and the multifamily seem to be weathering the storm better than expected right now. Most of my multifamily owners are reporting that they’re seeing anywhere from about 10 to 25% of the tenants that are asking for some sort of relief, which is a pretty good sign, I think, because I would have expected that to be maybe a higher amount. And I don’t know what it looks like in different parts of the country, I’m just focused on Nashville and the Southeast, so it’ll be interesting to tell. I think it’s still too early to tell, I think when May 1st rolls around and rent is due again, that it’s going to be much more telling in terms of what that looks like on the multifamily front.

Daniel Cocca:

Talking about being opportunistic, let’s chat a little bit about distressed investing. You mentioned earlier that lenders don’t want to foreclose on borrowers, they’d much rather prefer to work things out. But, in this current environment, because this pandemic basically affects everyone, as opposed to a specific retailer or hotel, for example, you’re going to have distressed investors coming in, I assume, offering to buy these loans off the balance sheet of the lenders, probably at some discount to the actual value of that loan, but when presented with that option and an uncertain future, specifically in the hospitality and retail, my guess is that lenders may be more likely to sell off these loans to folks who are willing to foreclose and who want to affectively take over a facility at a fraction of the cost. And so what do you think is going to happen in that environment? It’d just be interesting to hear your thoughts and commentary on distressed investing and the likelihood that we’ll see it. We saw it following 2008, in different ways, but I’m just curious what you’d expect to see today.

Todd Friedenberg:

Again, too early to tell, but I think if we head in that direction, there will be some opportunities, which depending on which side of the table you’re on, it’s an opportunity. But it’s just a matter of how long these lenders are going to stick with the property, they don’t want to have to write that off as a loss either. And I think some of these highly leveraged properties, I think we are going to see some of that, and from a standpoint, I think we’re going to see some pretty savvy multifamily developers look at maybe converting hotels to multifamily. And so I think, there, we’re going to see some opportunities and maybe some aggressive developers that are going to try to buy these loans from the bank or work something out with the property owner.

Todd Friedenberg:

So, that’s a real possibility, Dan, and I think that it’s probably coming, just, again, who knows what that’s going to look like? I think it’s still too early to tell because if things do start reopening and coming back in the next few months, I don’t think we’re going to see a whole lot of that; if this goes on through the end of the year, I think we are going to see a lot of that, and that’s going to be the big tipping point is to whether, come July or August, things haven’t change a whole lot and improved much, then I think we’re going to be having a conversation about this that’s going to be much more in-depth and we’re going to be able to show some real examples of where this is occurring.

AdaPia d’Errico:

I don’t know that I really have any other questions. I have all kinds of ideas about what I think retail could turn into, like schools.

Todd Friedenberg:

That’s a great idea.

AdaPia d’Errico:

I mean what else are you going to do with that land and those buildings? I mean maybe we can, as a society, refocus on education and health care, both from a physical land and building perspective and from a jobs perspective, I mean you could have millions of jobs for people taking care of those in need and educating future generations, I think that’s a great resource allocation, but I’m not in charge. But this is interesting to think creatively, I think the real estate industry has always been very resilient and has a lot of very good creative and goodhearted people, so it’d be interesting to see what happens with everything on a going-forward basis.

Todd Friedenberg:

One thing, it’s a little bit off-topic, somewhat, because I had a discussion with a real estate appraiser yesterday, in terms of cap rates and value going forward, because I feel like I’m in the Twilight Zone a little bit because treasury yields are down, interest rates are really low, which you would think, prior to this pandemic, would cause cap rates to even compress further. Now, there’s no real data because there hasn’t been many transactions since this started, rates are even lower than where they were, we’re really not in a equitity crisis, I don’t think.

Todd Friedenberg:

And, yet, this appraiser told me that, across the board, he’s increasing cap rates and appraisals by at least a quarter of a point, just to factor in the unknown of this whole pandemic, which I find strange because it seems like it should go the other way. I understand that there’s inherent risk of how these properties are going to perform, and so you have to take it down to, of course, if it’s a retail property or a hotel, I get it. So, that’s going to be a real interesting dynamic over the next few months to see which way that goes and how this whole pandemic will affect property values in the short-term, for sure, but I’m not sure what kind of long-term effect that that has over the next couple of years.

Daniel Cocca:

That’s a really interesting discussion topic for me, personally. As we think about the different stakeholders here and who’s ultimately responsible for paying the costs that all of this creates, whether it’s loss of value at the property level or what have you, and if we think about what’s happening, let’s take multifamily for example, you have a lot of hardworking Americans that are losing jobs through no fault of their own, and then they’re put into a dynamic where they may not be able to pay rent.

Daniel Cocca:

And the question really is: well, is that on them, or do we then push it to the landlord and say, “Well, the landlord’s still responsible for paying their lenders”? And then we take it another layer back and we say, “Well, the lenders, who is supporting them?” And you take a group like Bank of America, for example, they reported losses a couple days ago that were pretty substantial, and I think it was something like 3.5 billion of which was attributable to loan losses. And so now we say, “Well, is it equity stock market investors who should be feeling the brunt of that? They’re speculators, they, in theory, have capital and they understand the risks.”

Daniel Cocca:

And then we have this bigger stimulus package coming into play from the government, and I think something that gets lost in that is that we, as taxpayers, are ultimately paying that in one way or another, it’s not “free money” in the way that I think a lot of people may think that it is. And so really the question is: who should be responsible for all of this? How does the cost of this pandemic get allocated across all the different stakeholders in this very broad and elaborate ecosystem that we’ve created?

Todd Friedenberg:

I don’t have an answer. The best answer I can give you is: I have no idea. It’s a great question, Dan, and I think everybody’s asking that question, and the massive amount of debt that not only the U.S. is taking on, but every country in the world is saving their economy, and what does that look like in a few years, aside from the most obvious answer of massive inflation, which I’m not convinced that’s going to happen. So we could find ourselves in a, I don’t want to say worse situation, but in a different financial situation down the road, trying to figure all that out.

Todd Friedenberg:

But, ultimately, back to the value question, maybe I’m too optimistic about it, but I think ultimately we’re going to get back to where we were and still have to deal with this massive amount of debt that went into the world’s economy, but from an individual property standpoint and maybe where cap rates are heading, barring any huge movement in interest rates upward, which I don’t think we’re going to see, you would think that we should be, at least at a minimum at a level basis, maybe slightly lower values, just because of the short-term economic impact that this has had on properties, again, depending on property type.

Todd Friedenberg:

But, overall, I would hope that we’re in a pretty good position. And I think there will be plenty of opportunities out there for investors, I just don’t know where those opportunities are going to fall. But I think we’re going to see maybe some owners that were in transition properties get out, and so there may be some opportunities there for some repositioning of properties. But, again, who knows where we’re headed with this?

AdaPia d’Errico:

I guess the best we can do is what we’re doing now, which is take it day-by-day, stay informed, and watch things, and just try to do our best to make sense of what’s going on and to position ourselves for when those opportunities come into the market. Like at Alpha, as you know, we’re not doing any deals right now; we’re looking at a lot of them, we’re keeping ourselves very busy, there’s all kinds of potential opportunities, none that really fit our box, but we’re creating more content, we’re trying to put information out there for investors to understand, even just from our perspective, what’s going on.

AdaPia d’Errico:

And I think, even for me, that’s really helpful, sometimes a little overwhelming if you go down the rabbit hole, like Dan’s question, my head just started to go in the concentric circle, if you take it out, spiral out, out, out, how far out does it go? And then, at a certain point, my head just explodes because it’s too much. So, barring that, this staying informed and educated, and I also think rational and unemotional, it’s very easy to become emotional with what’s going on. But, anyway, that’s just a long way of saying that the best we can do right now is to stay informed about what’s going on, and I really appreciate your insights with what you’re seeing on a daily basis.

Todd Friedenberg:

Well, thanks. I appreciate the time with you guys, and hopefully we’ll revisit this topic again and maybe have some more information down the road, and hopefully it’s positive.

AdaPia d’Errico:

Thanks for tuning into Real Wealth Real Health. We hope that you’ve enjoyed today’s episode and found it both informative and insightful. We welcome all your questions and your feedback about today’s episode, and especially we welcome your questions about specific topics that you would like us to cover. So, shoot us an email at [email protected] And if you have a moment, we really appreciate ratings and reviews, as it helps us grow or online community and our interactions with you. And we’ll also be linking to a number of relevant articles on topics that we might have touched on during our conversations, some of them are broad, some of them are technical, but we’re always aiming to provide information that helps you better understand the mechanics of building this healthy financial foundation, especially if you’re looking to do this with real estate.