January 2021

Update on COVID's Effect on Office Space

Update on COVID’s Effect on Office Space

  • After almost a year of the coronavirus pandemic in the US, we take a look to see how how it is affecting the office space market.
  • The US as a whole and, Texas specifically, has seen a large increase in the amount of space available to sublease.
  • It’s likely too early to tell if this is a permanent trend or the market will rebound.

It’s hard to believe, but we are about a month and a half away from being a year into dealing with the coronavirus pandemic here in the US. Worldwide, we are already well over a year. Obviously there are a lot of terrible results of the pandemic. But this is a commercial real estate blog, so now, almost a year in, I want to go back and look at some of our hypotheses from the start of the pandemic.

Specifically, today I want to look at the effect COVID has had on the office market. In the last year, there have been a lot of different theories – often giving the exact opposite hypothesis. If you look back in this blog, you can probably find me advocating both sides of the coin – I tend to do that depending on the week.

But it’s an interesting question, and COVID presents a number of competing pressures on the office market. For example, lots of companies are working from home and having success – so will that be some of the norm going forward? On the flip side, will people want to be more spread out, in individual offices, inside an office footprint? That would require additional space. So what is the latest? Let’s look.

Sublease Space Has Increased Significantly

The Dallas Morning News published an article last week that spurred my thinking about this issue. According to that article, DFW currently has about 9 million square feet of office space available for sublease. This has exploded over the last year. At this time last year, there was approximately 6.2 million square feet of space available.

Similarly, last November, the Austin American Statesman reported that there was approximately 3.2 million square feet of office space available for sublease in Austin. This was a huge increase from last year, at this time – when there was approximately 1.1 million square feet.

And if this kind of increase in office space is happening in Texas, where companies are moving every day, you can bet it’s a trend nationwide. In December, there were approximately 163 million square feet of office space available to sublease in the US. By comparison, in 2009 during the height of the Great Recession, there was approximately 137 million square feet available for sublease.

So What Does That All Mean?

If you’ve read my blog or met me, you know how I will answer that question. I’m a lawyer – there’s only one answer – it depends.

I think on some level it’s still too early to tell. We do not know yet if this is a permanent move away from office space, or a temporary dip in demand due to the worst financial environment in 75 years.

It’s possible that companies have learned to work remotely and that will lead to a permanent reduction in the demand for office space. Or it’s possible that this is a normal, expected reaction from a terrible economy that we are still in the middle of. And as we start to recover and come out of this recession, that available sublease space will get eaten up at good rates. It’s probably still too soon to really tell what the overall result will be.

So what does that mean for the future for office investors and developers? Well, it depends.

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Finding a Good Solution for Austin's Homeless Population

Finding a Good Solution for Austin’s Homeless Population

  • There has been little to no improvement for Austin’s homeless population since I last wrote about Austin’s homeless situation.
  • Governor Abbott has recently threatened to reinstate Austin’s camping ban.
  • The City Council and Mayor recognize its current efforts are not working and are purchasing more hotels to house some of our homeless population.
  • It’s not clear to me what the solution is, but we should demand more from our local leaders to resolve this problem.

A couple of months ago, I wrote in this blog about the increasing homeless situation in Austin. This is not, of course, a new issue. Any Austin resident knows the basic story – back in 2019, the Austin City Council repealed its ban on camping in public. As a result, since then we have seen an explosion of permanent homeless encampments throughout the City, such as the one pictured above.

Since I wrote that article, there had not been much of a change in the situation – until last week. Now we have had a couple of new developments. And that’s what we will talk about in this entry – what the City and State can do to help our homeless population find permanent housing.

Governor Abbott Wants to Remove Homeless Encampments

We are in an odd numbered year in Texas, so that means the state legislature is meeting. For those not in Texas – our legislature meets for 140 days every two years. The latest session started on January 12.

Last week, Governor Abbott threatened that if the City of Austin did not re-instate its ban on public camping, he would. It’s not clear from his statement what exactly he means by this. Presumably, he means that he will work to pass a statewide ban on camping on public grounds. It is possible, therefore, that Abbott could get the legislature to pass a ban that would overrule the local ordinances.

There is a potential problem with this, however. As of 2019, it appears that camping bans may be unconstitutional. In December of that year, for example, the Supreme Court declined to consider a lower court ruling that Boise, Idaho’s camping ban was unconstitutional. As a result, if Texas does pass a statewide camping ban, it could be setting itself up for a number of lawsuits.

City of Austin Looking at Hotels for Homeless

In mid-2020, the City Council approved the purchase of a downtown-area hotel to house some of the homeless population. It was the fourth such time that the City Council had approved the purchase of a hotel for this purpose. This one would house approximately 75 homeless people.

On Monday, January 25, the City Council approved the purchase of two new hotels to house homeless folks. The new purchases will house approximately 150 people.

Mayor Adler has recently acknowledged what we all have known – the City’s repeal of the camping ban is not working. In his recent interview with the Statesman, Mayor Adler admitted that what they are doing now isn’t working – but neither did what the City was doing previously.

Not coincidentally, the City Council is now considering partially restoring the camping ban. Council Member Ann Kitchen raised a proposal to instruct the city manager to find ways to house a first group of homeless people by August and ban camping in four areas that have been overtaken by tent cities.

What is the Solution?

Austin has a homeless problem. That is not news to anyone. It’s good to see that the City Council and Mayor recognize that the current efforts do not work for anyone.

I do not know what the solution is. But there are smarter, more educated folks that have studied this around the country and come up with better solutions than what Austin has. Other cities have had success finding permanent housing for homeless people. They do not have this many people living in tent cities throughout the city. We need to look to those cities for guidance and ideas.

Hopefully, we can find a solution that benefits and helps our homeless population while also protecting neighborhoods and investments.

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Guess Whats Back Back Again PPP is Back Tell a Friend

Guess What’s Back? Back Again. PPP is Back. Tell a Friend.

  • In December’s stimulus, Congress earmarked money for a second round of PPP loans.
  • You can qualify if you are did not take a PPP loan the first time around, or if you are a second drawer. But there are different qualifications for each.
  • Contact your lender to find out how to apply – but be quick. The deadline is March 31.

Last summer, when the pandemic and shutdowns were just getting started, Congress helped small businesses by funding Paycheck Protection Program (“PPP”) loans. As you likely know, these loans were made to businesses to help them make payroll for a couple of months. And, assuming that money was used for payroll protection, these loans were forgivable. They really were a big help to many businesses.

Well, in the stimulus bill that passed back in December, Congress earmarked money for another round of PPP loans. And the Small Business Association (who issues the loans) has announced it is issuing them beginning January 13. As a result, lenders are now accepting applications. So who is this second round (or third, depending on how you count) for? Who can apply? For what expenses? And how much is available? Those are the questions we address in this blog entry.

Who Qualifies

Congress earmarked $284 billion for new PPP loans in the latest stimulus. In the bill, it attempted to correct some of the mistakes in the previous bill.

Under the new bill, funding is available to both new PPP borrowers and ones who received a PPP loan the first time. But there are some restrictions on who can apply. The SBA has divided the pool into the two groups – first time borrowers and second draw borrowers.

The following types of businesses are eligible to be first time borrowers:

  • Sole proprietors, independent contractors, and self-employed persons;

  • Any small business concern that meets SBA’s size standards; or

  • A company or non-profit organization with fewer than 500 employees (there are some exceptions for businesses in certain industries like food services where they can have more than 500 employees).

A first time borrower must have been in business on February 15, 2020 and it must certify that the “current economic uncertainty makes this loan request necessary” to support its continuing operations.

The qualifications are stricter for a second draw applicant. It must:

  • Have previously received a first draw PPP loan and used or will use the full amount only for authorized uses;

  • Have no more than 300 employees; and

  • Show at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

How Much is Available?

If a business qualifies under one of these two scenarios, it is eligible for a first or second PPP loan. Again, the loans are to be used for payroll related expenses.

A first time borrower is eligible for 2.5 times its monthly payroll cost up to $10 million. It will, obviously, be required to show what its monthly payroll cost is. A second draw borrower can also receive 2.5 times its monthly payroll cost, but the cap is $2 million. There is an exception to this for a borrower in the Accommodation and Food Services sector – that business can receive up to 3.5 times its monthly payroll costs up to $2 million.

How to Get the PPP Loan

As with the previous loan, if your business wants a PPP loan, you need to apply through an approved participating community financial institution. It’s best to start with your bank and ask them if they issue these loans. If not, they will likely have a recommendation. Or, if you prefer, I have a great referral if you give me a call.

It is important, however, to take quick action. The deadline for applications is March 31. So make sure you get your application in before that.

Finally, if you are approved and use the funds for approved expenses, these loans are again forgivable.

Those of you who received these loans the first time around know what a lifeline they were during difficult times. The fact that they are back is a big boost to small businesses. If you have any questions or need any help or a referral, please do not hesitate to give me a call at 512-614-0335. But of course, you can always do this process Without Me.

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Two End of Year Extensions Affect Multifamily Properties

Two End of Year Extensions Affect Multifamily Properties

  • Prior to the end of the year, there were two extensions affecting multifamily properties at the federal level.
  • Specifically, the CDC extended its moratorium on evictions and the Agencies extended their willingness to do forbearances.
  • While these apply to multifamily properties nationwide, as a property owner you also must be aware of local and state ordinances.

A few weeks ago, I wrote in this blog about how the City of Austin had extended its moratoriums on evictions until at least January 31, 2021. In that article, I stupidly wrote that I doubted the CDC would extend its own moratorium when it expired on December 31.

Well wouldn’t you know it – less than a week after I wrote that, Congress passed a new stimulus bill in which it extended the CDC moratorium until at least January 31. Your honest blogger, however, has left that article up so you can laugh at my naivete.

Since that time, there has been another extension at the federal level that affects multifamily property. In this entry, I discuss the two extensions and what they mean for property owners. Those two extensions are:

CDC Moratorium

I have discussed the CDC moratorium previously in this blog, but I think it’s a good idea to recap exactly what it means and what it entails.

Under the moratorium, a landlord cannot evict a tenant for non-payment of rent if the tenant has provided a declaration (something similar to this one provided by the CDC) explaining that:

  • The tenant has used his or her best efforts to get government funding;

  • He or she will not make more than $99,000 for the calendar year of either 2020 or 2021;

  • He or she is unable to make rent due to substantial loss caused by COVID; and

  • If evicted, he or she will likely be homeless.

It is the tenant’s affirmative responsibility to provide this declaration to the landlord. If he or she does not provide the CDC’s declaration (or similar form), the landlord can move forward with eviction proceedings.

Also, if the landlord does not believe the tenant, it can challenge the veracity of the declaration in court.

Violations of the CDC’s order has serious financial ramifications, so if you have any questions about it, please feel free to contact us.

Fannie/Freddie Forbearance

As mentioned above, the second extension that came prior to the end of the year was Fannie and Freddie extended their willingness to accept requests for forbearance until at least March 31, 2021.

Under the order, property owners with agency-backed multifamily mortgages can enter a new or, if qualified, modified forbearance if they experience a financial hardship due to the COVID-19 emergency.

To take advantage of this program, however, the property owner must:

  • Inform tenants about tenant protections available during the forbearance and repayment periods; and

  • Agree not to evict tenants solely for non-payment of rent while the loan is in forbearance.

Additionally, during the repayment periods, property owners must:

  • Give tenants at least a 30 day notice to vacate;

  • Not charge tenants late fees or penalties for non-payment of rent; and

  • Allow tenants flexibility of payback for non-payment of rent.

As you can see, therefore, there are significant downsides to seeking a forbearance from Fannie/Freddie. But during these difficult times, it may be a necessity.

Local Laws Still Apply

As always, none of these rules displace any local rules that are still in effect. For example, in the article mentioned above, I talked about Austin extending its eviction moratorium. That moratorium is also still in place. So as a property owner, you have to follow all of the federal, state, and local orders. Obviously this can get quite tricky. If you have any questions, please do not hesitate to reach out to us at 512-614-0335.

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Le Retour de Detroit

Le Retour de Detroit

  • As you likely know, Detroit has gone through some rough decades in the recent past.
  • But thanks to people invested in the City – including commercial developers – Detroit is starting to have a renaissance.
  • There are a lot of cool, new developments in the City now.

I hope everyone had a great holiday season and a happy new year. Hopefully you were able to celebrate safely with your family and not read this dumb blog.

But because I know you missed it, I’d like to begin the year talking about something upbeat – the revitalization of my hometown – Detroit, Michigan. Technically, I grew up in the eastern suburbs of Detroit, but I identify the D as my hometown.

As you probably know, Detroit has been the butt of many jokes for the past 30 years as it faced some really difficult times. But in the last 5-10 years, the City has seen a significant revitalization with the help of commercial developers. Detroit is on its way back – and it’s great to see.

The Brief History

I’m not going to bore you with an in-depth, detailed history of this once great City. But it’s important to know that in 1950, the City of Detroit had 1.85 million residents. And in the current (2020) census, its population is expected to be about 670,000.

There are lots of reasons for the decline – terrible management, racism, changing auto industry, etc. But the reality is the city had a steep decline in population. And because it has such a large geographic footprint, that’s why you see so many boarded up and/or burnt out buildings. There is just a lot of vacant, empty space in the city. And that (along with the crime issues) helped Detroit become the warning sign for the decay of American cities.

The Return

But that vacancy also provides a huge opportunity for real estate developers. And a lot of them are taking advantage.

It has really started with Dan Gilbert – who has been at the forefront of the Detroit rebirth. You may know Gilbert is the co-founder of Quicken Loans. He is also from the metro Detroit area. And at some point in the last 15 or so years, he decided he wanted to spearhead the revitalization of Detroit. As a result, he bought up – at very low rates – many buildings and real estate in the City. And he has renovated and/or built many commercial buildings there.

Other developers are now piggybacking off Gilbert’s work and developing their own projects. The redevelopment started in Downtown and the immediately surrounding areas like Corktown and Midtown. But it is slowly starting to spread farther. Again, Detroit has a huge geographic footprint – bigger than Manhattan. So it is going to take a while. The growth, though, is continuing.

Exciting Projects

For a native Metro Detroiter, these are exciting times. More exciting than at any time of my not so short life. The amazing thing about Detroit is I can’t think of another large city in the US where a developer can go in, buy a bunch of land in the heart of the city at reasonable prices, and develop their own destination.

And developers are doing this with some really cool projects. Among others, I encourage you to check out –

These are really unique, cool destinations that are brand new to the city. And that is just a fraction of what is going on in Detroit.

Like I said, its an exciting time to see the rebirth of a major American city. I encourage you to check out what’s going on up there. And hopefully Detroit will no longer be the punchline for jokes.

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