2020 has rapidly polarized the commercial real estate industry

Summarizing 2020 for the commercial real estate industry or any industry is a difficult task. Over the past 12 months, the events have caused all real estate markets to experience changes that could never be summarized in one article. However, one conclusion is clear: The events of 2020 have rapidly polarized the industry.

Depending on the sector examined, the statistics convey vastly different narratives of how markets have responded to international relations, government regulation, and, of course, COVID-19. Some markets, such as warehousing and distribution facilities, have boomed with low vacancy rates and high demand on a national scale. Others, such as retail, restaurant and office spaces, have expectedly suffered on a national level due to work-from-home policies and government-mandated closures. Others, such as multifamily residential, have stayed static, likely due to consumers’ governmental protections.

Locally, Northwest Arkansas appears to be insulated from much of the national negativity. Although the region’s retail market experienced a noticeable dip (evident by a spike in vacancy mirroring the national average), several local Fortune 500 companies’ growth has increased demand for office space and multifamily developments.

Despite the divergence across the industry, practitioners from every corner of the market have been intensely focused on state and federal involvement in the everyday transactions between lenders, borrowers, landlords and tenants. There is no question that 2020 will be marked by implementing a variety of COVID-19 borrower and tenant protections.

The broader federal COVID-19 relief provided residential tenants and borrowers several protections from eviction and foreclosure. The CARES Act proscribes a forbearance on mortgage payment collections on federally backed mortgages under certain conditions, and landlords of residential tenants are subject to a moratorium on evictions due to monetary defaults.

Without question, these protections serve as a saving grace for many families during a period of extreme joblessness. As a result, national residential real estate indicators have remained mostly static. However, a market correction may be imminent. Because these protections do not eliminate existing obligations and sunset after Dec. 31, most forecasts predict an increase in eviction and foreclosure actions in 2021. Even so, recent research from the National Multifamily Housing Council may provide a glimmer of hope in that 87% of apartment households were able to make full or partial rent payments by early August.

Lenders have been asked by property owners to modify existing loan obligations during periods of cash flow shortfalls and partial or nonexistent rental payments. These modifications can spell bad news for institutional lenders and securitization trusts reliant on mortgage payment income from commercial properties. However, federal lawmakers have provided lenders additional leeway to assist borrowers struggling to meet debt obligations without reporting troubled debt modifications to facilitate market flexibility. Like the CARES Act protections, these regulations are only effective through Dec. 31.

On the other hand, due to ongoing cash flow concerns and numerous loan modifications limiting lenders’ ability to quantify borrowers’ credit risk, it is possible that a market correction by way of extensive foreclosures could be imminent, even with the federal actions.

As we advance into 2021, real estate practitioners must review their loan and lease documents to ensure they comply with economic and non-economic covenants. As COVID-19 protection policies sunset at the end of 2020, lenders, borrowers, landlords and tenants must be aware of and attempt to mitigate the potential risks they face.

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