Real Estate Industry Alerts Tracker - September 25, 2020 Issue
September 25, 2020


New Jersey Court Refuses to Dismiss Insurance Claim for Business Interruption Related to the Pandemic

A New Jersey state trial court denied an insurance company’s motion to dismiss an insured’s claim for coverage for its losses related to the pandemic. In Optical Services USA/JC1 v. Franklin Mutual Ins. Co., No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cty. Aug. 13, 2020), the policyholders asserted that the business interruption policies they purchased were intended to protect their businesses from an “unanticipated crisis,” such as Governor Murphy’s stay-at-home order issued at the beginning of the pandemic. The insurer moved to dismiss the complaint, arguing that the policy terms required direct physical damage to the premises. Further, as there was no known instance of COVID-19 transmission or contamination within the insured’s premises, the insurer claimed there was no direct physical loss. The trial court questioned why the policy did not contain specific exclusions for pandemics and the insurer conceded that the policy did not contain a specifically applicable exclusion. The court found that there were unsettled questions under New Jersey law as to whether the loss of the functional use of the property was insured as a direct physical loss under an insurance policy. It concluded that the insured should be permitted to prove that the emergency closure orders by Governor Murphy constituted a covered loss under the policy.

National Apartment Association Sues CDC Over Eviction Moratorium

The National Apartment Association and the New Civil Liberties Alliance have joined forces in Richard Lee Brown, et al. v. Secretary Alex Azar, et al., a lawsuit filed in the United States District Court for the Northern District of Georgia, Atlanta Division which challenges the CDC’s eviction moratorium. As we reported in a prior issue, the CDC issued an eviction moratorium through December 31, 2020. It claimed it had authority to do so pursuant to the Public Health Service Act, which permits the agency to “make and enforce such regulations” that are necessary for the prevention of the introduction, transmission or spread of communicable diseases (such as the novel coronavirus). The groups argue that the CDC’s power to prevent the spread of communicable diseases involves “inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection,” but that the issuance of the eviction moratorium was beyond its prescribed powers. The groups also claimed that, under the Administrative Procedure Act, the CDC’s order must be set aside as arbitrary and unreasonable, as it was not supported by a rational determination drawn from substantial evidence. They argued that, prior to taking measures under the Public Health Service Act, the CDC must show that local jurisdictions are taking insufficient measures to prevent the spread of the coronavirus and that it failed to do so. Additionally, they argued that in enacting the moratorium, the CDC failed to catalogue the efforts by any state or local jurisdictions to combat the pandemic or to explain why allowing eviction proceedings caused an increase in infection rates warranting agency action.

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

Heard Around the Industry

Confidence In The Construction Market Increased In The Third Quarter: The U.S. Chamber of Commerce Commercial Construction Index for the third quarter of this year showed slight increases in confidence in the construction market, as well as revenue expectations, as compared with the second quarter. The first quarter construction index, which tracks the period prior to pandemic related shutdowns, was 74. The confidence score within the construction market for that same period was 70. The construction index, as well as confidence in the market and revenue expectations, took a huge hit during the early months of the pandemic. During the second quarter, the construction index dropped to 56 and the confidence rating to 48. However, both numbers increased slightly in the third quarter, as the construction index went up to 57 and the confidence rating went up to 56. The increases reflect contractor’s confidence that the U.S. markets should provide ample new opportunities within the next year.

Additional information may be found here.

Freddie Mac Multifamily Apartment Investment Market Index Falls in the Second Quarter: The Freddie Mac Multifamily Apartment Investment Market Index (“AIMI”), which had posted a quarterly increase of 1.8% in the first quarter of 2020, fell by 0.3% in the second quarter. In addition, net operating income (“NOI”) fell by 1.2% in the second quarter, marking the first time both indicators were negative in the second quarter. The AIMI decline was attributed to the negative NOI in the second quarter as well as mixed property price growth. While AIMI results for the quarter were mixed, they were generally negative. The country as a whole, as well as twenty metropolitan markets, saw AIMI decline while only five metropolitan areas experienced an increase in AIMI. NOI growth was also negative nationwide and in all markets, with the exception of the Philadelphia market.

Additional information may be found here.

REIT Stocks Down 16.38% Year-to-Date: The FTSE Nareit U.S. Real Estate Index Series (the “Nareit Index”) for all equity REITS declined 16.38% year-to-date. REITS, as a whole, are underperforming the broader stock market as evidenced by the S&P 500, which is up 0.78% year-to-date. Hotel, retail, office and apartment REITs have suffered most, while data center, industrial and infrastructure REITs have performed well this year. According to the Nareit Index,  year-to-date:
  • apartment REIT segment was down 25%

  • lodging REIT segment was down 47%

  • office REIT stocks had decreased 28.8%

REITs with New York City office portfolios fared far worse, with three REIT stocks closing down 56%, 49.1%, and 47.5% year-to-date. Further:
  • full retail REIT segment was down 36.3% year-to-date

  • regional mall REITs were down 50.4%

  • shopping center REITs down 40.1%

  • free-standing retail REITs down 17.6% year-to-date

  • two major mall REITs down 55% and 73.5% year-to-date

On the flip side, stock prices in the data center REIT segment had increased by 24.7% year-to-date, stock prices for industrial REITs increased 8.4%, and REITs that own telecommunications infrastructure experienced a 12.8% increase year-to-date.

Additional information may be found here.

The Five Largest Hotel Flags in the World Lost Over $25 Billion in Market Capitalization Due to the COVID-19 Crisis: As we have previously reported, the hotel sector has been among the hardest hit from the coronavirus outbreak. According to and reporting by CityBizList, the combined market capitalization of Wyndham Hotels and Resorts, Choice Hotels International, Marriott International, Intercontinental Hotels Group, and Hilton Worldwide Holdings (the five largest hotel chains in the world) hit $79.2bn in September, a $25.2bn plunge since the beginning of 2020.

Additional information may be found here.

Approximately 90% of NYC Restaurants Failed to Pay Rent in August: According to a report from the NYC Hospitality Alliance, 87% of the City’s restaurants were unable to pay full rent in August. The majority of restaurant landlords (60%) still have not waived rent during the pandemic and of the 40% of landlords that have waived rent, less than 1/3 waived more than half of rent, according to the report. The report also noted that 90% of respondents have been unable to renegotiate their lease amid the pandemic.

A copy of the report may be found here.

CMBS Special Servicing Rate Continued to Climb in August: According to Trepp Analytics, the Trepp Special Servicing rate increased by 55 basis points in August to 10.04% as compared to 9.49% in July. The surge, according to Trepp is mainly attributable to the increase in retail and lodging special servicing rates. The retail special servicing rate in August was 17.3% as compared to 16% in July. The lodging special servicing rate in August was 25% as compared to 24.3% in July.

Additional information may be found here.

Cushman & Wakefield Reports that Office Pricing Should Recover by the End of 2022: According to Cushman & Wakefield’s “U.S. Property Markets & The Economy,” office pricing will likely recover by late 2022. The findings in the report are based on the following presumptions: (1) office employment across the country will decline by 1.2 million jobs in 2020, (2) Congress will eventually pass another relief bill, (3) concerns surrounding the pandemic will begin to fade by mid-2021, and (4) “the historical relationship between job losses and net absorption holds true in this cycle.” Cushman predicts that while the number of people working from home will increase from 5% to 10%, 90% of office employees will opt to return to the office.

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