2020 has rapidly polarized the commercial real estate industry

Summing up 2020 for commercial real estate or any other industry is a difficult task. Over the past 12 months, events have resulted in changes in all property markets that could never be summed up in one article. One conclusion, however, is clear: the events of 2020 quickly polarized the industry.

Depending on the sector studied, the statistics give very different representations of how markets have responded to international relations, government regulation and, of course, COVID-19. Some markets, such as warehouse and distribution equipment, boomed with low vacancy rates and high demand at the national level. Others, such as retail, restaurant and office space, have likely suffered nationally from working from home and government-mandated closings. Others, like apartment buildings, have remained unchanged, likely due to government protection of consumers.

On the ground, Northwest Arkansas seems isolated from much of the national negativity. Although the retail market in the region has seen a noticeable decline (reflected in a rise in vacancies at the national average), the growth of several local Fortune 500 companies has increased demand for office space and apartment buildings.

Despite the cross-industry differences, practitioners from all areas of the market have concentrated intensively on the involvement of the federal and state governments in the day-to-day transactions between lenders, borrowers, landlords and tenants. There is no question that 2020 will be marked by the implementation of a variety of COVID-19 borrower and tenant protection measures.

The federal government’s more comprehensive COVID-19 relief offered tenants and borrowers in residential areas additional protection against eviction and foreclosure. The CARES Act prohibits leniency in the collection of mortgage payments on government-funded mortgages under certain conditions, and tenant landlords are subject to a moratorium on evictions due to defaults.

Without question, these protective measures serve as a salvation for many families in times of extreme unemployment. As a result, the national indicators for residential property have remained largely static. However, a market correction may be imminent. Since these safeguards do not remove the existing obligations and sunset after December 31, most projections predict an increase in eviction and foreclosure measures in 2021. Nevertheless, recent studies by the National Apartment House Council could give a glimmer of hope for these 87% Residential households were able to pay full or partial rents until the beginning of August.

Lenders have been asked by the owners to amend existing loan obligations during times of cash flow bottlenecks and partial or non-existent rental payments. These changes can mean bad news for institutional lenders and securitization firms that rely on income from mortgage payments on commercial real estate. However, federal lawmakers have given additional leeway to lenders to help borrowers struggling to meet their debt obligations without reporting problematic debt changes to facilitate market flexibility. Like CARES Act protection, these provisions only last through December 31st.

On the other hand, due to ongoing cash flow concerns and numerous loan changes that limit the ability of lenders to quantify borrowers’ credit risk, it is possible that a market correction through extensive foreclosures is imminent, including for federal measures.

Throughout 2021, real estate professionals will need to review their loan and leasing documents to ensure they are complying with economic and non-economic requirements. As the COVID-19 protection guidelines expire in late 2020, lenders, borrowers, landlords, and renters need to know the potential risks they face and try to mitigate them.

Richard “Dick” Levin is an attorney and stockholder at Hall Estill in Fayetteville. The opinions expressed are those of the author.