Worst of the worst: The real estate disasters of 2020

Empty offices, shut down retail stores, closing restaurants and literal fires are among the biggest real estate disasters of 2020. (Getty)

Empty offices, shut down retail stores, closing restaurants and literal fires are among the biggest real estate disasters of 2020. (Getty)

Vacant offices. Shuttered restaurants. Empty hotels.

The pressure on real estate was relentless this year as the pandemic took down struggling sectors — and some healthy ones, too. Except for a few blessed sectors, such as industrial space (hello, Amazon!), fiascos were unavoidable.

To explain the catastrophe that was 2020, we picked 10 of the biggest real estate disasters to highlight.

Where is everybody?

Say this for the Partnership for New York City: It is no cheerleader.

The business group released surveys laying out in stark detail how empty city office buildings are. Attendance has risen — from horrendous to merely abysmal. First 8 percent, then 10 percent, then 13. President Donald Trump called Gotham a “ghost town” and his lie trackers didn’t argue.

But every office market struggled as the virus surged and work-from-home proved productive and popular. Dallas barely has 4 in 10 office workers showing up, but guess what? It’s the No. 1 market in the U.S.

“We need to get through a very difficult point now,” said Anthony Malkin, chairman and CEO of New York office REIT Empire State Realty. “We probably won’t see the bottom until the first quarter of 2022.”

Restaurants’ perfect storm

The restaurant business began 2020 stronger than ever. Then came a perfect storm: a deadly virus that spreads like wildfire when people gather indoors without masks. A month later New York limited service to takeout and delivery, triggering mass layoffs.

Reopening has been marked by caution and reversals, and as of October, 88 percent of NYC eateries still could not pay full rent. A month later, 54 percent statewide said they would likely not survive another six months without federal relief.

The experience has been similar elsewhere, including L.A., where even outdoor dining was banned to tamp down a second wave.

A Penney for your retail chain

For brick-and-mortar stores, the pandemic piled on to a retail apocalypse triggered by the e-commerce boom. Shutdowns and infection fears accelerated online shopping’s gains, and 25,000 stores were expected to close as a result of Covid.

Retail giants were among them: J.C. Penney filed for Chapter 11 in mid-May and has since closed 150 locations. (Simon Property Group and Brookfield Property Partners are now trying to salvage it.)

Other retail bankruptcies included Neiman Marcus, Ascena Retail Group and GNC, while many other stores, including Macy’s and Gap, pulled out of malls and pared down their store counts. Home improvement stores such as Home Depot and Lowe’s did thrive in 2020, but for the foreseeable future, it’s Amazon’s world.

Fire in the whole

Covid vaccines will solve many of real estate’s problems in the next year or two, but not the wildfires that have increasingly plagued the West Coast in recent years. And this fire season was the worst one yet in California.

Unfortunately, it is not clear what will keep the seemingly annual blazes at bay. Global temperatures will continue to increase, fostering conditions that put huge swaths of California, Oregon and Washington at risk. Some homeowners are seeing annual fire insurance premiums rise to tens of thousands of dollars, if they can get a policy at all.

One strategy would be to return large, fire-prone areas to nature, concentrate development in urban areas and relocate millions of people, something the real estate industry, especially in California, has never been inclined to do, let alone done.

Heading For Zero

When shaky sectors began to crumble under the pandemic’s weight, that meant trouble for New York’s oversaturated luxury condo market and the developers who created it. If one firm has emerged as the poster child for big bets and bad timing, it would be HFZ Capital Group.

HFZ has faced a reckoning across its multibillion-dollar Manhattan portfolio, with $300 million in collections piling up from its investors, lenders, contractors and other vendors. Sales have dragged and construction has stalled at the XI, its flagship project along the High Line. Making matters worse, the firm’s principals are personally liable for some loans.

While HFZ may be the first big Manhattan developer at risk of losing it all in the pandemic, it is far from alone when it comes to financial woes. Slow sales and a tight market for financing have pushed a number of major projects to the brink of distress and in some cases into foreclosure auctions.

And the supply problem shows no signs of dissipating. Unsold new-development units in Manhattan will take 8.7 years to sell, according to appraiser Jonathan Miller of Miller Samuel.

Anbang, you’re dead

Hotels are hurting like never before, so picking the hospitality sector’s worst fiasco of 2020 is like shooting fish in a barrel. But some fish are bigger than others. In one of the largest real estate deals undone by the pandemic, plans by Chinese insurer Anbang to sell a $5.8 billion luxury hotel portfolio collapsed as the coronavirus crushed the hospitality sector.

The prospective buyer, South Korea’s Mirae Asset Global Investments, pointed to non-pandemic factors as justification for backing out, including a bizarre deed fraud scheme involving a trademark troll, obscure Delaware arbitration laws and possibly high-ranking members of the Chinese Communist Party.

Not that it mattered in the end: In allowing Mirae to terminate the deal, a judge noted that contract terms required Anbang to operate the hotels in the “ordinary course of business” — which the pandemic had rendered impossible.

Pain All Year

Early this year, Yoel Goldman’s All Year Management was lining up a pair of big deals to alleviate the Brooklyn developer’s cash flow problems: a $675 million refinancing for its Denizen Bushwick luxury rental complex, and a $300 million-plus multifamily portfolio sale. Then the pandemic struck.

The portfolio deal seemed to fall through in May, then was renegotiated in July, but the buyers — led by investor David Werner — missed a deposit in September. Meanwhile, the refinancing deal earned provisional ratings from a ratings agency, but that loan didn’t close either. Things came to a head in November when All Year skipped a payment on its Tel Aviv-listed bonds and postponed its financial reporting, sending its bond prices plunging.

The firm is now in default on numerous loans, and the mezzanine lender on its prized Denizen Bushwick property has scheduled a UCC foreclosure sale for February. And on the final day of the year, it was reported that All Year defaulted on a $66 million loan for a property in Gowanus and, having failed to file third-quarter reports and make bond payments, would be delisted from the Tel Aviv Stock Exchange.

Take these jobs and…

The death of the Industry City rezoning reaffirmed local City Council members’ power and willingness to kill major development projects, and reopened real estate’s wounds from losing Amazon’s HQ2.

More than five years after unveiling its plans for a $1 billion commercial hub, the Industry City development team withdrew an application that would have allowed more retail, academic and commercial space, and instead will pursue permitted uses, such as a last-mile distribution center.

Local Council member Carlos Menchaca and other elected officials in Brooklyn opposed the project, arguing that its thousands of new jobs would accelerate gentrification and displacement in Sunset Park. Arguments that the city desperately needs jobs and tax revenue did not move Menchaca, who — far from being chastened — announced his candidacy for mayor.

Eviction benediction

When shutdowns crippled the economy, landlords braced for an eviction moratorium of perhaps three months. Instead, evictions have been on hold for more than nine.

After being peeled back slightly over the summer, this week the ban was broadened and extended until March 1, with an additional two months for tenants who declare hardship. Landlords say lawmakers are encouraging nonpayment of rent, which could cost them their buildings.

Tenants and their lobbyists will try to carry their political momentum into fights next year for taxes on second homes, universal rent control and canceling rent altogether.

High price of admission

It’s been a difficult year for many in real estate, but especially for Bob Zangrillo. An initial partner in the multibillion Magic City Innovation project in Miami, Zangrillo was charged in the college admissions scandal dubbed Varsity Blues. Zangrillo is also battling allegations by the Federal Trade Commission that a company he chaired was running scam websites that mimicked government sites. Zangrillo is fighting all of the charges, but other developers have already distanced themselves from him. In February, Avra Jain said Zangrillo is out at her Miami River project.

Simon Ziff on distress investing: “Do a lot of homework”

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In the first installation of TRD Tips, Simon Ziff sat (virtually) with The Real Deal‘s editor-in-chief Stuart Elliott to give some insights on real estate investing.

Ziff, whose Ackman-Ziff Real Estate Group closed more than $7 billion in deals last year and about $85 billion in total since he became president, said he expects distressed deals to happen “deeper into the downturn.” But that’s not stopping him and other investors from watching what loans are being sent to special servicing and keeping tabs on sectors hit hardest by the pandemic, like retail and hospitality.

“There will be other distressed assets along the way, and typically it will be because they’re overfinanced and the owner has to just get out,” Ziff said.

Watch the video above for the full interview and keep an eye out for more TRD Tips coming soon.

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SoftBank bails out Katerra with $200M cash injection

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Katerra CEO; SoftBank CEO Masayoshi Son and Katerra CEO Paal Kibsgaard (Photos via Katerra; Getty; iStock)

Katerra CEO; SoftBank CEO Masayoshi Son and Katerra CEO Paal Kibsgaard (Photos via Katerra; Getty; iStock)

Once bitten, twice shy? Not so for Japanese investment firm SoftBank, which despite its ill-fated bet on WeWork has agreed to pump a pile of cash into another real estate tech startup.

SoftBank plans to invest another $200 million into struggling construction startup Katerra, a move that will effectively save it from bankruptcy, the Wall Street Journal reports.

Under the deal, Greensill Capital, a financial services company also backed by SoftBank, will get a 5 percent stake in Katerra in exchange for erasing about $435 million in debt, the Journal said. SoftBank will also become Katerra’s majority stakeholder.

Katerra was founded in 2015 with a goal of transforming the $12 trillion global construction. But the company has had a patchy record, struggling with delays, cost overruns and mass layoffs.

Katerra’s co-founder Michael Marks stepped down as CEO in May to work full-time for venture capital firm WRVI Capital.

“I greatly respect the backing that we got from SoftBank and wish them the absolute best and hope that I can be helpful,” he told the Journal in a statement Wednesday.

Paal Kibsgaard, formerly Katerra’s chief operating officer, stepped in as CEO with a directive to get the company’s finances in order.

SoftBank said in a statement Wednesday that Kibsgaard “addressed several operational inefficiencies and improved the financial trajectory of Katerra,” adding that the firm remained “committed to the company’s long-term vision and believes the current leadership team has the ability to make this vision a reality.”

[WSJ] — Sylvia Varnham O’Regan

The post SoftBank bails out Katerra with $200M cash injection appeared first on The Real Deal South Florida.

From industrial windfalls to office market freefalls: Chicago’s biggest real estate stories of 2020

203 Sheridan Road in Winnetka and 3507 West 51st Street on the Southwest Side (Redfin, 42 Floors, iStock)

203 Sheridan Road in Winnetka and 3507 West 51st Street on the Southwest Side (Redfin, 42 Floors, iStock)

Let’s start with a bit of good news — given that 2020 didn’t provide Chicago’s real estate market with much of it.

The industrial sector withstood a bruising year far better than most others, sustained in large part by Amazon. As e-commerce orders soared during the pandemic, the Jeff Bezos behemoth went on a warehouse-leasing binge in Chicago.

But other asset classes in the city have spent the last nine-plus months on a skyscraper elevator in freefall. The ride has left much of the industry queasy and stumbling as it heads into 2021.

During the early months of Covid, as Chicago retailers were still grappling with lost revenue, protests over the police killing of George Floyd led to widespread store looting and vandalism across downtown and other neighborhoods. Then it happened again in the summer. Pandemic-related closures and restrictions have devastated those business owners and landlords, with many now barely hanging on.

The local hotel industry also remains among the most hobbled in the U.S., while Chicago’s office market, once a turbocharged engine, has sputtered. Companies have shed downtown space at alarming rates, with a growing number looking to sublease and some ditching their leases entirely.

But Chicago’s housing market may be one other silver lining. Sales have picked up in recent months, especially in the suburbs, after having stalled out earlier in the year.

Industrial strength

Amazon went on a warehouse shopping spree. From March through July, the e-commerce giant inked lease deals for 11 million square feet of distribution centers in the Chicago area alone. Amazon accounted for over 50 percent of new leasing volume during the second quarter in Chicago, according to Colliers International, though the total fell in Q3. Still, investors have taken notice. Last week, investment firm GCP paid $42 million for a 316,000-square-foot Amazon-leased warehouse on the Southwest Side, among the priciest deals in the city this year on a per-square-foot basis.

Room at the inns

With Chicago’s hotel occupancy among the lowest nationwide, loan defaults have piled up. Recent appraisals have slashed property values, including at the Palmer House Hilton and the 610-room JW Marriott. And, as of September, the pandemic had cost the city about 12,000 hospitality jobs.

By October, numerous hotels in Cook County had skipped their latest property tax payments, adding up to nearly $500 million. Even the Hilton Chicago O’Hare Airport, owned by the city of Chicago and operated by Hilton, was late in paying its taxes.

But some investors also went bargain-hunting. In November, billionaire entrepreneur Joe Mansueto agreed to buy the Waldorf Astoria Chicago for $54 million, a year after its lender seized control of the Gold Coast hotel in foreclosure proceedings. And a select few firms eyed new construction. Developer Marc Realty Capital wants to build a 296-key hotel in Fulton Market. It would be the second hotel project the company is slating for the trendy neighborhood. Marc Realty and investor Relu Stan filed plans for the 14-story hotel at 311 North Sangamon Street last month.

Retail reckoning

The hits kept coming for Chicago’s retail industry. On top of dealing with the pandemic, many Magnificent Mile and Downtown stores sustained damage from looting and vandalism in late May and again in August, when some protests over police brutality turned violent.

More than 2,500 businesses hurt by Covid-19 and the lootings did get a boost in August, receiving a total of $46 million in grants. But many others said they still hadn’t received payouts after filing business interruption claims, despite Gov. J.B. Pritzker telling insurers to “do the right thing and do it fast.”

Adding to the problems, the restaurant industry received mixed messages about Covid restrictions from the state’s two most powerful elected officials.

In late October, Pritzker said he was imposing new restrictions on indoor dining in Chicago, while Mayor Lori Lightfoot began trying to change his mind over concerns about the fragile state of the economy. But with Covid cases continuing to rise, a stay-at-home order was imposed; indoor dining remains suspended and nonessential businesses must close from 11 p.m. to 6 a.m.

Malls get mauled

More mall owners around the Chicago area sought to give up on their struggling retail properties, which have been squeezed by capacity limits and Covid closures. Among them is Starwood Retail Partners, which in late October decided to hand over the keys to its nearly 1 million-square-foot Louis Joliet Mall, about 40 miles southwest of Chicago. Starwood had last made a payment on its $85 million CMBS loan in March.

Less than a month before that, BlitzLake Partners and GW Properties relinquished their Orland Park mall after skipping more than 90 days of loan payments. The duo is now facing a multimillion-dollar lender foreclosure lawsuit tied to the 164,000-square-foot shopping center.

One note of optimism: A Brookfield Property Partners venture landed a $475 million refinancing of the second-largest shopping mall in the Chicago area. In October, Morgan Stanley provided the debt on the 2.2-million-square-foot Oakbrook Center, which Brookfield owns with an affiliate of the California Public Employees’ Retirement System. The deal marked the largest refinancing of a Chicago-area commercial property since June 2018.

Office overload

The fall of downtown the city’s office market, which entered 2020 riding high, was swift and sharp. By the third quarter, remote working had pushed the vacancy rate to 16.5 percent, the highest it had been in a decade. Available office sublease space, meanwhile, reached a record 4.6 million square feet in the same period, as companies — including tech firms that had recently plowed into the market — scaled back their footprints and future plans.

They’re downsizing or rightsizing,” CBRE’s Bradley Serot told The Real Deal’s Akiko Matsuda in October. “They don’t need the space as robust and large because they’re not going to recruit as much as what they were planning.”

But not everyone is heading out. 601W Companies, which transformed the Old Post Office into a modern office building, is taking on another major redevelopment project nearby. The company will pay $180 million to overhaul a 591,000-square-foot property at 801 South Canal Street. In February, 601W paid $68 million for the vacant office building.

And this fall, Pittsburgh-based Normandy Properties dropped $412 million for the McDonald’s global HQ building in Fulton Market. The seller, a joint venture of Sterling Bay and JPMorgan Chase, developed the 575,000-square-foot building in 2018. The fast-food giant has a long-term lease and occupies about 85 percent of the nine-story building. The deal also marked Chicago’s priciest investment sale in 2020. The second spot on that list belongs to Michael Shvo, who in January paid $376 million for the nearly 50-year-old “Big Red” office tower in downtown.

Home, home again

The Chicago-area housing market evaporated in the early months of the pandemic — particularly in the city’s core. But since this summer, it has been charging back. Sales jumped in August, when more than 13,000 homes sold across the nine counties, about 20 percent over the same period the year before.

A recent weekly report from Midwest Real Estate Data showed Chicago-area home prices have maintained a double-digit increase year-over-year ever since, according to Crain’s.

As home sales picked up in the city, it surged in the suburbs with buyers prioritizing more space over proximity to Chicago’s central business district. That trend was most apparent at the top of the market. Five of the 10 most expensive homes that sold in Cook County in 2020 were in tony Winnetka. Last year, just one suburban property made the top 10 list.

And in a sign of the times, the priciest home that sold during the pandemic this year came with 9,000 square feet of private beach.

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Tales from the industrial boom

Tales from the industrial boom

Eastview Commerce Center in Miami, formerly a golf course

A former Miami golf course turned into an industrial park. A Hollywood warehouse chopped up into six smaller offerings. And a bidding war over industrial space in East Hialeah.

Commercial brokers recount these tales in South Florida, a market with high demand for warehouses but not enough industrial-zoned land for new development. Industrial experts must turn to creative problem-solving, as a reluctance to visit brick-and-mortar stores has led to a boom in online shopping and a burgeoning need to store appliances, food and other goods.

Miami-Dade County may only have about 500 acres of developable industrial land left, mostly controlled by institutional developers and real estate investment trusts. New, desirable, Class A warehouses take up about 10 acres each, said Jonathan Kingsley, an executive managing director at Colliers International’s local office.

That available land translates to 9 million square feet of warehouse space in a year that Amazon has leased or bought about 2 million square feet and Home Depot has leased another 1.1 million square feet, said Steve Medwin, Newmark’s executive managing director and co-lead of the South Florida Industrial Services division. E-commerce companies want warehouses as large as 100,000 square feet with 32-foot-high clear ceilings.

The land constraint worsens northward: Broward County might only have about 400 acres of developable land left, and Palm Beach County might have 250 acres, Medwin said.

South Florida’s land shortage puts it on par with the industrial markets of Los Angeles and Northern New Jersey. In Seattle and New York, developers take inspiration from Asia and plan for mega multistory warehouses, an asset that is still five to 10 years away in South Florida, brokers say.

Some real estate professionals see signs of a bubble in the nationwide industrial boom. According to real estate research firm Real Capital Analytics, values for industrial properties rose 8.5 percent in the past year, while retail real estate values fell 5.2 percent and offices stayed steady.

JLL’s third quarter report identified weakness in the South Florida market, ranking Miami-Dade and Broward counties No. 2 and 3 nationwide for the amount of industrial space that returned to the market year to date. Palm Beach County ranked No. 6. But brokers say that when tenants vacate an industrial space for larger and newer warehouses, it can take at least six months for a new tenant to move in. The brokers expect South Florida’s fourth quarter results to show high absorption rates from new move-ins.

Meanwhile, South Florida’s third quarter industrial vacancy rates were below 10 percent, according to JLL. Miami’s vacancy rate was 7.6 percent with an asking rent of $7.43 per square foot. Broward had a 9 percent vacancy rate and an $8.50 per square foot average asking rent. Palm Beach’s vacancy rate was 5.2 percent with an average asking rent of $9.40 per square foot. In the third quarter, almost 3 million square feet of industrial space was under construction in Miami, among 4.5 million square feet under construction in the tri-county area.

In the land of scarce land availability, developers and investors do what they can with what they have, said Medwin of Newmark.

Among the properties his team markets is 800,000 square feet of spec industrial space at Eastview Commerce Center at the southern half of the former Westview Country Club near Opa-locka.

The developer, Panattoni Development Company, bought the land from a former country club member and was prepared to invest millions in remediation and reconfiguring the golf course. It took three years for the lengthy zoning process and to address the environmental impact, Medwin said. The zoning delay is par for the course for newcomers to South Florida, he said.

In the end, Panattoni’s bet paid off. The $100 million business park at Northwest 24th Avenue and Northwest 119th Street was completed in January and is currently 98 percent leased. Rents at the park are more than $8.50 a square foot triple net with tenants including Caterpillar and produce distributor Mr. Greens.

Panattoni has moved on to another redevelopment project. Last year it paid $24.3 million for a 20-acre dairy farm nearby with plans to build another spec warehouse project.

The only way to own industrial land in South Florida is to get creative,” Medwin said. “If you’re an institutional developer who wants industrial property in this thriving port market, you have to go through this pain.”

Sometimes, overbidding is also required.

Starting this summer, Kingsley of Colliers helped a longtime client look for overflow warehouse space in Miami-Dade County. The client, a third-party logistics company, toured four spots in four weeks. By the end of that period, three of them were snatched up.

The company now has an offer for a 40,000-square-foot, second-generation warehouse built in the 1960s in East Hialeah. To get the space, the client will likely have to pay more than the landlord is asking. For this property in a place like East Hialeah, rates range from $6 per square foot to $8 a square foot, Kingsley said.

The bidding process is expected in a constrained land market, Kingsley said. It existed even before Covid-19, and it will outlive the pandemic, he added.

Creativity in the industrial market can come in many forms, brokers say. After more than 40 years in South Florida real estate, Alan Levy considers a Hollywood warehouse among his most complicated deals.

Levy and his son, Josh, at Levy Realty Advisors, had a client with a dilapidated 30,000-square-foot Hollywood building that had cycled through various uses over the years, including as the site of defunct toy store chain Lionel Playworld.

But the property near the intersection of State Road 7 and Pembroke Road had a mixed-use zoning that allowed for redevelopment.

I saw a diamond in the rough,” said Levy, who works with private equity firms and family offices to find long-term real estate investments. “I saw the potential.”

Levy and his team entertained offers for his client to either sell the property or lease it to one tenant. Instead, Levy spent nine months and $1.7 million for work on the building, subdividing it into five units. The building is now fully leased to tenants that were looking for 24-foot clear ceilings, a little shorter than the height e-commerce tenants demand. The space is leased at an average of $12.50 per square foot triple net.

In South Florida, you cannot buy this kind of land,” Levy said. “You could never accomplish what we did for what we put into it.”

The post Tales from the industrial boom appeared first on The Real Deal South Florida.

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