The Real Deal: 5 Key Insights for Pandemic-Era Real Estate Investors
The COVID-19 pandemic has caused a global economic slowdown, but that doesn’t mean all economic activity is flagging — just ask members of V&E’s real estate practice. Since the start of the pandemic, the real estate group has closed a wide array of transactions worth approximately $3.7 billion across the U.S.
“It’s more difficult to get deals done in this current climate, but with some perseverance and hard work and parties that want to get deals done, notwithstanding the health crisis around the country, the deals are getting done,” explained V&E partner Wally Schwartz, the co-head of the real estate group. “We’re helping clients invest in great opportunities around the country.”
What’s driving the recent success and volume of real estate deals? Stock market volatility is one factor. Since the outbreak of COVID-19, stocks have been on a proverbial roller coaster ride, with the CBOE Volatility Index, also known as the VIX, reaching a record high in March. Equities-wary investors are turning to real estate investments like REITs because of their relative stability, said Paul Martin, the Dallas-based co-head of the group.
“When you’ve got a very unsettled stock market, there is some movement towards more stable investments, and that fits the REIT bill,” Martin said.
But investors are also drawn to real estate deals more broadly because of specific market trends that are leading to lucrative opportunities. Here are five trends that Schwartz, Martin and their colleagues are helping clients leverage:
1. The decline of brick-and-mortar stores and the travel industry is inspiring bargain hunters.
While shuttered storefronts were not an uncommon sight before the pandemic, they’re even more common now.
“The pandemic has accelerated the trend of online retail businesses replacing brick-and-mortar retail,” said Schwartz, who is based in New York. The decline of brick-and-mortar stores in New York and across the country, he said, represents an opportunity for investors who can scoop up retail properties at attractive prices. A similar trend is occurring in the travel and lodging business, with hotel properties declining in price due to the drastic decline in travel during the pandemic.
“Opportunistic investors are looking to get a real bargain from somebody who is not able to survive the current crisis,” Schwartz said.
2. The rise of online retailers has turbo-charged real estate’s industrial segment.
The hottest properties on the market right now are those used for warehouses and distribution centers in connection with online retail. Developers and investors are constantly making deals with major online retailers to sell or lease properties to store their goods. Schwartz explained that online retailers need more distribution centers than ever because customers today expect speedy deliveries.
“The competition has become so fierce that it’s no longer acceptable to tell customers that they will have a delivery in four or five or six days,” Schwartz said. “Most of the time you have to promise same day or next day delivery. The only way that that can happen is to have these warehouses and distribution centers everywhere, and that’s exactly what’s happening now: everybody who is involved with transporting online retail is looking for industrial space all across the country.”
The industrial deals that V&E has been working on have included distribution centers and warehouses for Amazon, Hayneedle and Wayfair, as well as Walmart, which has also seen its online sales skyrocket during the pandemic.
3. Pandemic-related obstacles aren’t deal breakers.
Often private equity funds partner in a joint venture with national or local developers to do the renovation or construction necessary to prepare an industrial property for an online retailer’s needs. “It’s important that investors and developers are making sure that whatever project they buy, remodel or build is really the type of modern industrial product that industrial tenants want or need,” Martin said.
But such work requires various permits and government approvals, which are more challenging to secure when so many offices are closed during the pandemic.
“You just can’t go to the desk and talk to the city engineer about traffic planning or approval of plans and specifications. Those offices are generally closed in most towns,” Martin said. He added, however, that the situation is improving.
“It does appear that officials are getting used to working from home and the logjam seems to be lessening as we get further into the pandemic,” he said. City officials intent on garnering new tax revenue from online retailers “understand that for their own benefit, they need to be cooperative and approve things on a timely basis, and they’re having their employees work from home and do that.”
4. Speed helps buyers close competitive deals.
Closing a deal in an efficient manner is always preferable to a long, drawn-out process . . . but it’s become even more critical during the pandemic.
“I’ve been involved in a few deals in the last couple of months where we have reluctant sellers with private equity clients buying the assets and the seller agrees to a lower price than what they were originally hoping for before the pandemic,” Martin explained. “That lower price is usually conditioned upon the speed of transacting.”
Sellers may be in a rush because pandemic-related economic turmoil has left them low on cash. In other cases, they might anticipate difficulties down the road — if, for instance, their pandemic-crunched tenants have trouble making future rent payments — and would prefer to rid themselves of risk by selling off properties.
Martin noted that V&E has excelled at working on compressed timelines to close even the most complicated deals.
“One of the things that’s really held us in good standing is that we have a very deep bench of talent at the partner level, the counsel level and the associate level, so we can take on really large deals that are on super-fast time frames and close them in order to meet the requirements of reluctant sellers,” he said.
Schwartz recalled how V&E attorneys in both Dallas and New York — some 40 lawyers in all — completed due diligence on 26 different properties over a single weekend to help close a $750 billion deal for their client, WPT Industrial REIT, to purchase interests in a portfolio of 26 distribution and logistics properties.
“The New York group and the Dallas group worked together to divide up the due diligence and did a heck of a job reviewing 26 properties,” Schwartz said. “The depth of having a group like that in Dallas and New York adds to this type of responsiveness that we can provide for our clients. Quite often, it makes the difference between whether they get the deal or not.”
5. Creditworthiness matters more than ever.
These days, real estate investors are being extra careful in picking the counterparties that will be able to fulfill their obligations. The pandemic-borne economic slump means many struggling businesses won’t, so V&E attorneys work with their clients to choose wisely.
“People are paying a lot more attention to the credit underwriting than I’ve seen them do in the last five or six years,” Martin said. “Right now, if you’ve got a good product and you’ve got multiple offers, you want to spend a lot of time making sure you’re taking the right course.”
The recent spate of deals notwithstanding, Schwartz said the V&E real estate team is prepared to take on even more.
“As the U.S. emerges from this crisis, there are going to be a lot of great real estate investment opportunities around the country,” he said, “and we’re on the case.”
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.