Real Estate Industry Alerts Tracker - August 7, 2020 Issue
August 7, 2020

 

New Jersey Mall Sues Tenant for Breaching Lease Provision to Remain Open

A prominent tenant in a major New Jersey shopping mall was sued by its landlord for refusing to re-open its space after New Jersey lifted its restrictions on indoor shopping malls. As a result of the pandemic and Governor Murphy’s closure orders, all indoor portions within the mall (including the tenant’s space) were shuttered for three months. During that period, the tenant exercised an early termination provision contained in its lease. The early termination clause required the tenant to remain open for one year after it exercised the early termination right.  Shortly after shopping malls were allowed to re-open in New Jersey, the mall notified its tenants of its intention to do so. The tenant announced that it would be closing most of its retail locations, including the New Jersey location, and refused to re-open and operate its store at the mall. The landlord sued for breach of contract and injunctive relief barring the tenant from closing the store. It claimed that the lease required the tenant to be open for business if at least 80% of the other retail tenants at the mall are open or obligated to be open.

Additional information may be found here and a copy of the complaint may be found here.
 

New York Courts Lift Stay of Foreclosure Proceedings

Consistent with Governor Cuomo’s recent executive orders easing various restrictions related to the pandemic, on July 24, 2020, New York State Chief Administrative Judge Lawrence K. Marks issued Administrative Order 157/20 (“AO/157/20”) allowing residential foreclosures to proceed through judgment, and foreclosure auctions to be held beginning October 15, 2020.  Pursuant to Governor Cuomo’s Executive Order 202.28, the stay of commencement and enforcement of commercial foreclosures will remain in place under AO/157/20 until August 19, 2020, but only if the Mortgagor is “eligible for unemployment insurance or benefits under state or federal law or otherwise facing financial hardship due to the COVID-19 pandemic.” The following are some of the key provisions of AO/157/20:

  • Prior to conducting any further proceedings in any foreclosure matter, the court must initiate a status or settlement conference (including, where applicable, a settlement conference pursuant to CPLR Rule 3408). If any party does not appear at the conference, the court shall reschedule and make a second attempt to hold the conference before undertaking further proceedings.

  • At the conference, the court shall review the procedural history of the matter; confirm compliance with notice requirements, inquire into the effects, if any, that the COVID-19 pandemic has had on the parties; review any special relief under state or federal law to which the parties may be entitled in light of the pandemic; refer unrepresented parties to local civil legal service providers and housing counseling agencies; assess any pending and anticipated motions; approve briefing schedules proposed by stipulation of the parties; and use best efforts (including referral to alternative dispute resolution) to resolve any outstanding issues.

  • Following the conference, the court may (1) direct further briefing of any motion as needed, and (2) issue a decision on any motion, including a motion for foreclosure and sale.  Pending and newly-filed motions may be considered and decided in all foreclosure matters – including residential and commercial matters, matters in which one or both parties are self­-represented, and matters commenced prior to and during the COVID-19 pandemic. In ordering relief in a commercial foreclosure matter, the court shall stay enforcement if and as required under Executive Orders 202.28, 202.48, and related Executive Orders.

  • Any foreclosure conference or proceeding will be conducted remotely to the fullest extent practicable.

  • No auction or sale of property in any residential or commercial foreclosure matter shall be scheduled to occur prior to October 15, 2020.

A copy of Administrative Order 157/20 may be found here.

New York Extends Remote Online Notarization, Eviction Ban

Governor Andrew Cuomo recently issued Executive Order 202.55. Among other things, the order extended the emergency authorization permitting the use of remote online notarization as well as the statewide moratorium on evictions. Both are in effect through September 4, 2020. The New York State Office of Court Administration is expected to issue guidance with respect to the extension of the moratorium.

A copy of the order may be found here.

Heard Around the Industry

Commercial Real Estate Investors Show Increased Optimism as More Market Data Becomes Available: The second edition of the Colliers International “Investor Sentiment Survey” shows increased investor optimism in the commercial real estate market.  In a recent interview with Brian Lee of Globe St., David Amsterdam of Colliers stated that “[i]nvestors are more optimistic, as there is more information in the market and a better understanding of where capital allocations will go and how debt markets are operating.” Amsterdam also noted that “[i]nvestors expect to remain in a low interest rate environment in the near-term, and with the debt markets showing positive improvement, this should set a sound backdrop for a resumption of sales activity.” Approximately half of the survey respondents feel that transaction volume will return to normalcy by the middle of 2021, and a quarter of the respondents say it will be business as usual by the end of next year. The survey shows a slower recovery with respect to asset pricing; however, with about a third of respondents foreseeing a return to prior peek pricing sometime next year, 35% in 2022, 23% in 2023 and 10% in 2024. The survey (a copy of which is linked below) breaks down the level of investor sentiment across various CRE asset classes.

A copy of Colliers’ “Investor Sentiment Survey Second Edition” may be found here and additional information may be found here.

Retail Rents Sink Across New York City: As a result of the pandemic, retail rents are dropping and an increasing number of retail spaces are being occupied by non-luxury tenants. America’s most expensive retail districts, New York City being no exception, are losing tenants. According to CBRE, the average asking rent in the second quarter along 16 retail corridors in Manhattan fell to $688 per square foot, the first time since 2011 that average asking rent dropped below $700 representing an 11.3% decline from the same time last year. Rents in SOHO dropped 37.5% year-over-year from $699 per square foot to $437 per square foot, which is the first time since 2014 rental rates in SOHO have been below $500. The Upper Madison Avenue corridor (between 57th Street and 72nd Street) experienced a 15.3% decline in asking rents as compared to last year, dropping to $882 per square foot. Even the most expensive retail corridor in Manhattan (the Plaza District running from 49th Street to 59th Street) experienced a 4.8% drop from last year (although rents remained steady from the prior quarter, at $3,000 per square foot).  CBRE estimates that asking rents will continue to decline for the rest of the year as fewer people, especially tourists, are shopping during the pandemic.

Additional information may be found here.

Freddie Mac’s Midyear Outlook Predicts Higher Vacancy Rates and Lower Rent Growth in the Multifamily Sector: Freddie Mac issued its “Multifamily 2020 Midyear Outlook” in which it analyzed the impact of the pandemic on the residential multifamily housing market.  According to the report, performance in the multifamily market was solid into the first quarter of 2020 with stable occupancy and moderate rent growth. However, the report finds that the pandemic’s effects on the economy are likely to weaken the multifamily market, with vacancy rates up 2% to 2.5% and rents down 1.2% to 1.7%. A result of the pandemic, gross income growth is anticipated to decrease by 3.3% to 4.2% for the year. The report did find that most well-positioned properties are still likely to be able to pay their debt service given a gross decline of 4.2% only translates to a 0.05 reduction of a property’s debt service coverage ratio.

A copy of the report can be found here.

Analysis Finds Hotel Profits Improve in Certain Categories: A joint analysis prepared by STR and AirDNA shows that short-term rentals of larger units withstood the pandemic better than hotels and smaller short-term rentals. Short-term rentals of larger units had a 61.4% occupancy rate during quarantine while short-term rentals of smaller units had a slightly lower occupancy rate of 58.2%. Hotel occupancy rates, on the other hand, were only 39.2% during the same period. According to STR’s data, U.S. hotel gross operating profits declined 105.4% in June, which is an improvement as compared to April and May, in which operating profits declined 116.9% and 110.1%, respectively. STR’s analysis calculated profitability using data from total revenue per available room, gross operating profit per available room, total labor costs per available room, and EBITDA.

Additional information can be found here.

Shopping Center Reabsorption Levels Reach Recession Levels: Cushman and Wakefield recently reported that during the second quarter of 2020 the U.S. outdoor shopping center market recorded its largest rate of reabsorption of space since 2009, with 7.7 million square feet of space being returned during the quarter. Overall, 12.2 million square feet of space was reabsorbed so far this year. The report noted that, despite the reabsorption of 7.7 million square feet in the second quarter, its impact on vacancy and rents has been moderate with vacancy rates going up 20 basis points over the last quarter to 6.8%, and the overall asking rate remained steady at $17.58 per square foot. Large outdoor shopping centers with big box stores and a mix of retailers (“power centers”) that were permitted to remain open as essential businesses obviously fared better as compared to smaller strip centers.

Additional information can be found here.

Office Space in the Aftermath of the Pandemic: A new report on office space trends from CBRE revealed that companies are likely to be more flexible in terms of working remotely even after fears of the pandemic subside. In a survey of 126 companies, of which one-half are on the Fortune 500 list, 63% of respondents indicated that they would provide employees with more options as to work locations, although only 25% planned to allow employees to work remotely full time. Companies are employing a cost-benefit analysis, weighing employee safety, the cost of physical office space, as well as the technology costs related to supporting a hybrid workforce.  Some work functions may still require employees to be physically present, as there’s a certain amount of productivity and innovation that requires in-person collaboration.

Additional information can be found here.

Underused Parking Lots Generate New Revenue for Mall Owners: Mall owners are exploring ways to turn underutilized parking lots into drive-in movie theaters and virtual concert venues as a way to recoup lost income resulting from the restrictions on retail operations related to the pandemic.

Additional information can be found here.