Real Estate Industry Alerts Tracker - July 10, 2020 Issue

Connecticut Governor Lamont Issues Executive Order Extending Certain Protections for Residential Renters During the Pandemic

On April 10, 2020, Governor Lamont issued Executive Order No. 7X, which provided certain protections to residential tenants during the pandemic. On June 29, 2020, Governor Lamont issued Executive Order No. 7DDD, which extended protections provided by Executive Order No. 7X. Executive Order No. 7DDD provides, among other things, that:

• Residential landlords, their legal representatives, or attorneys-in-fact are not permitted to deliver a notice to quit or serve or return a summary process action prior to August 22, 2020, except for serious nuisance or nonpayment of rent due on or prior to February 29, 2020; and
• Residential tenants that have been financially impacted by the pandemic and who have paid more than one month’s rent as a security deposit may now request that landlords withdraw the amount of the security deposit in excess of one month’s rent and apply it to the rent due in April, May, June, July, or August, 2020. The request must be made in writing and electronic communication (i.e., email) is acceptable. Additionally, landlords cannot demand that the security deposit be restored prior to the later of (a) the end of the public health and civil preparedness emergency (including any extensions or renewals of the emergency), and (b) the date that the rental agreement is extended or renewed.

The executive order does not relieve tenants of their liability for unpaid rent, nor does it relieve renters or landlords of their responsibility to comply with their respective obligations under the leases or state statutes.

A copy of Executive Order No. 7DDD may be found here.

Florida Extends Moratorium on Evictions and Foreclosures

On June 30, 2020, Florida Governor Ron DeSantis signed Executive Order Number 20-159, which (again) extends the state’s moratorium on evictions and foreclosures until August 1, 2020. The moratorium on mortgage foreclosures applies to both commercial and residential properties, but the moratorium on evictions only applies to residential properties. While Florida landlords are prohibited from evicting residential tenants that are unable to pay rent, they are not prohibited from commencing residential eviction proceedings for non-monetary defaults and in most Florida counties there is no bar on commercial eviction proceedings.

A copy of Executive Order Number 20-159 may be found here and additional information may be found here.

San Diego City Counsel Extends Eviction Moratorium and Approves Rental Assistance Program

On June 30, 2020, the San Diego City Council extended the moratorium on residential and commercial evictions through September 30, 2020. It also approved a $15.1 million rental assistance program that will provide qualified households with a one-time payment to pay for past-due or upcoming rent.

Extension of Moratorium on Residential and Commercial Evictions: The June 30, 2020, vote extended an existing city-wide moratorium on commercial and residential evictions, which was initially instated at the outset of the pandemic and prohibits landlords from taking any action to evict a tenant for non-payment of rent due on or after March 12, 2020. The initial moratorium was effective through May 31, 2020, and was previously extended through June 30, 2020. The current extension runs through September 30, 2020.

The extension did not change the requirements that residential and commercial tenants must satisfy in order to avoid eviction during the moratorium. They are:

1. The tenant must be unable to pay rent due to ​“financial impacts” related to the pandemic.
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   2. For residential tenants, this means that the tenant must have suffered a substantial decrease in household income; and
   3. For commercial tenants, this means that the tenant must have suffered a substantial decrease in business income, in each case, due to business closure, loss of compensable hours of work or wages, layoffs, or substantial out-of-pocket medical expenses due to a public health order or other governmental guidance.
2. If the tenant meets the applicable ​“financial impacts” requirements, the tenant must then notify the landlord, in writing, of the tenant’s inability to pay rent due to the financial impacts of the pandemic on or prior to the date on which rent is due. The notice must be in writing (which can be by mail, e-mail or text message).
3. Within a week of providing notice to the landlord, the tenant must provide ​“objectionably verifiable information” (such as pay stubs, bank statements, an employer letter or other information) verifying the financial hardship and demonstrating how the pandemic and government responses adversely impacted the tenant’s finances.

Tenants who are protected from evictions by the ordinance have up to six months from the date the ordinance is effective (March 25, 2020 – September 25, 2020) or the date Governor Newsom’s executive order is withdrawn, whichever occurs soonest, to pay their landlords all unpaid rent. Tenants that vacate their property while the order is in effect must pay all past due rent upon moving out. The order not only prohibits the filing or prosecuting of unlawful detainer actions, but also prohibits landlords from serving a 3-Day Notice to Pay or Quit.

Approval of a Rental Assistance Program: The $15.1 million rental assistance program approved by the San Diego City Council will provide qualified households with a one-time payment to pay for past-due or upcoming rent. The program, which is only available to residential tenants, provides for a one-time payment of up to $4,000 to qualified residential tenants to pay for any past-owed or upcoming rent. It is available to tenants: (a) whose primary residence is located in the City of San Diego; (b) whose household income as of January 1, 2020, is no more than 60% of the median income in San Diego; (c) whose household is not currently receiving any rental subsidies; (d) whose household does not have enough money in a savings account to meet their financial obligations; (e) whose household has eligible immigration status; (f) who are not tenants of a property owned or managed by the San Diego Housing Commission; and (g) whose household is experiencing a financial hardship that is directly related to the effects of the pandemic. The San Diego City Council projects that over 3,500 households will receive a rental assistance payment under the rental assistance program.

Additional information may be found here and here.

Heard Around the Industry

Delinquency Rate for CMBS Loans Jumps to Over 10% in June: According to new Trepp Analytics data, the delinquency rate of loans in the CMBS market rose to 10.32% in June. This represents a 317 basis point increase in the delinquency rate from May, and a 748 basis point rise from last year when the CMBS delinquency rate was 2.84%. The July delinquencies are expected to be greater because 4.1% of loans (by balance) missed the June payment but were less than 30 days delinquent. Of the loans that are more than 30 days past due, the  hotel and retail sectors had the largest jumps in delinquency rates, with retail delinquencies up to 18.07% (an increase of 788 basis points from May) and lodging up to 24.3% (an increase of 522 basis points from May). Office and Multifamily loans reported delinquency rates of 2.66% and 3.29%, respectively. Industrial delinquencies reported at 1.57% (a decrease from 1.82% in May).

Additional information may be found here.

Deal Values in New York City Drop During the Pandemic: According to a report by Colliers, a total of 416 investment sales transactions closed in the first half of the year, down from the 698 transactions that closed in the first half of last year. Of those, 37.7% of the deals that closed were for multifamily properties. The average value of deals also dropped over last year. By way of example, the average sales price for a Manhattan office building fell from $919 per square foot to $656 per square foot in the second quarter of 2020. Also in Manhattan, leasing volume dropped by more than one-half, quarter-over-quarter. It declined from 11.19 million square feet in the second quarter of 2019 to 3.18 million square feet in 2020 (a nearly 72% drop). Leasing velocity during the first six months of 2020 was 10 million square feet, which is approximately 50% less than the 20.26 million square feet in the first six months of 2019. Leasing activity during the second quarter of 2020 was 64.6% below Manhattan’s five-year rolling average of 9.01 million square feet and 61.6% below the ten-year average of 8.30 million square feet. The asking rent in Manhattan decreased by 0.2% during the second quarter.

Additional information may be found here.

Federal Reserve Stress Tests Estimate Banks May Lose $48B on Commercial Real Estate Loans: As mandated by the Dodd-Frank Act of 2010, the Federal Reserve required 33 financial institutions to participate in financial stress tests, with the tests estimating losses in commercial real estate loans, residential mortgages, business loans, and other credit and consumer financing products. The losses were estimated based on a worst-case scenario, involving, for example, a global recession, heightened stress in commercial real estate and corporate debt markets, 10% unemployment into 2021, and a contraction of U.S. gross domestic product by as much as 10%.

Based on the latest stress test, under the foregoing worst-case scenario, U.S. banks could lose as much as $47.6 billion on commercial real estate loans over the next two years. Most banks are estimated to lose $2 billion or less.

• Wells Fargo & Co. would be expected to lose $10 billion
• Bank of America Corp. would lose $4.9 billion
• JP Morgan Chase & Co. would lose $3.8 billion
• Truist Financial Corp. would lose $3.3 billion

Even under the worst-case scenario, commercial real estate losses are not anticipated for American Express Co., Barclays US, Credit Suisse Holdings (USA), and Discover Financial Services. For many banks, however, commercial real estate loan losses would be relatively small compared to other kinds of losses, such as business loans and credit card lending. In addition, while the latest stress test shows that banks will suffer under the worst-case scenario analysis, it did not find that any of the institutions are in existential danger under present circumstances.

Additional information may be found here.

US Life and Annuity Insurers Increase Commercial Mortgage Loan Holdings: According to a recent report by AM Best, a global credit rating agency specializing in the insurance industry, the commercial mortgage loan holdings of US life and annuity insurance companies (“L/A Insurers”) have increased considerably in recent years. L/A Insurers currently hold approximately $522 billion in commercial mortgage loans as compared to $382 billion in 2015 (an 8% increase year-over-year). While various factors such as favorable GDP growth, low unemployment and rising retail sales boded well for the holdings in 2019, the report finds that more recent trends may lead to declines. In a press release for the report, AM Best stated ​“as the pandemic leads to loan forbearance, along with remote work forces and travel restrictions, the potential for deterioration in credit quality grows.” AM Best did note, however, that the low exposure of L/A Insurers to the hotel sector will help minimize the impact. ​“Instead, insurers will feel the impact of longer-term pandemic conditions through accelerated loss recognition, leading to pressure on GAAP earnings.”

Additional information may be found here.

Survey Reveals Growth in Industrial Sector: A newly released survey by the Society of Industrial and Office Realtors (SIOR) examining the effects of the pandemic on markets revealed the highest confidence level for office and industrial markets since the pandemic began. Overall, the confidence level increased from 6.22 (the findings in the report are based on a 10-point scale) in May to 6.61 in June. However, confidence varied by region and market. Industrial brokers in the Northwest, Southwest, and Global regions showed the most confidence, while brokers in the Central region were the least confident. The Global region reported an increase in industrial confidence (from 6.3 to 7.3) and a decrease in office confidence (from 6.8 to 5.9). In the Central region, industrial confidence dropped from 6.1 to 5.2, while the Northeast region saw an increase in office confidence from 5.5 to 6.6.

The survey also reported on the status of current transactions, with on schedule transactions increasing (as a percentage of total transactions) from 31% in May to 37% in June. The increase is primarily attributable to the increase of on schedule transactions in the industrial sector, which saw an increase from 31% in May to 41% in June. In the office sector, the percentage of on schedule transactions dropped slightly over the past month, with a decrease of less than 1%.

Additional information may be found here and here.

Real Estate Roundtable’s 2020 Q2 Economic Sentiment Index Confirms Economic Downturn: The Real Estate Roundtable issued its second quarter 2020 Economic Sentiment Index. The survey is a measure of the confidence and expectations of senior executives within the commercial real estate industry as to the condition of the commercial real estate market. Any score above 50 is viewed as positive. The second quarter report registered a score of 38, which is a 14 point decrease from the score for the first quarter of 2020. Among other things, the report noted that:

• many respondents confirmed tenants were experiencing increased difficulties in paying rent as a result of massive job losses related to the pandemic;
• most respondents believe that the eventual re-opening of businesses and resolution of rent obligations will result in improved market conditions; and
• the majority of respondents indicated the availability of debt and equity are worse today than one year ago (many believe there is plenty of equity capital on the sidelines, but it is unwilling to invest in a market without price discovery).

A copy of the second quarter 2020 Economic Sentiment Index may be found here and additional information may be found here. 

Life Sciences Industry Adding Lab Facilities During Pandemic: In its midyear update, Colliers International Life Sciences noted that life science companies are accelerating research and development activity as a result of the pandemic. This pivot to new COVID-related initiatives has increased activity and staffing and is driving new demand for laboratory research facilities. Activity has also increased in non-COVID related projects. The increased activity within the sector, for both COVID and non-COVID related projects, has resulted in a rise in office building owners considering the repositioning of their buildings to laboratories or lab-capable buildings to meet the demand for lab space. The Colliers report also noted that, with supply chain concerns continuing, Congress is considering legislation that would incentivize the development of domestic raw materials and increased ingredient manufacturing capacity in the United States. This may result in increased small-scale contract manufacturing closer to research and development labs on the East Coast.

Additional information may be found here.