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PROGNOSTICATIONS FOR THE COMING YEAR IN COMMERCIAL REAL ESTATE

4/8/2021 | Articles & Alerts, News & Resources, Real Estate Transactional, Zoning & Development

Forecasters, political or weather (think Punxsutawney Phil) seldom admit prior failures. Casey Stengel astutely observed that one should “never make predictions, especially about the future.” With due respect to Casey, I have agreed to engage in the fruitless endeavor of forecasting the immediate future of commercial real estate and those lawyers who practice in that arena.

Pessimism is not in the DNA of the CRE industry. However, 2021 will present challenges for CRE. Residential real estate will continue to benefit from low-interest rates and high demand, notably multi-family housing. Although calls for robust tenant protection and continuing eviction bans will provide headwinds. Tax incentives and abatements for affordable housing, and opportunity zones, may face elimination as local government reacts to budget shortfalls. Non-residential assets face a longer recovery time. Despite recent vaccine distribution, lockdowns persist. Urban CRE will be less popular in areas where respectful political discourse have given way to open hostility. Elected officials must get substantial financial help into the hands of those in need, many of whom are unemployed due to the lockdown of small and medium-sized businesses.

Some CRE hotels, for example, have already been hurt by the enhanced scrutiny of the financial system and new hurdles to flexible real estate lending practices. Government has taken notice of the recent all-time high of $3.06 trillion in CRE debt and the 10.2% of $600 billion in CMBS loans now in “special servicing.” Loan distress is fast approaching the levels seen in the 2008 financial crisis.

Some troubled asset classes could snap back, although the time horizon for recovery may approach years. Unfortunately, some office buildings will never again approach full occupancy, now that many homes have been transformed into pseudo office space. While some may miss the social interaction of physically being at the workplace, few like the absence of long commutes and high transportation costs.   

With that introduction in mind, here is my vision for the CRE legal community.

  • Not unlike the 2008 crisis, distressed CRE loans will result in foreclosure, modification, or the ubiquitous practice of “extend and pretend.” I forecast a long and profitable run for financial service attorneys and their opposing counsel.
  • Transactional attorneys may see fewer outright acquisitions, although potential purchasers flush with cash will be actively bargain hunting for deals. While there may be fewer new lease or loan transactions, modifications will continue unabated for the foreseeable future.
  • Land use and environmental attorneys should expect continuing growth in residential and institutional development, including multi-family, senior living, memory, and assisted living facilities. Development of large parcels of land for distribution hubs and life science campuses will remain popular. Conversions of retail and office buildings to multi-family or non-traditional mixed uses will be popular. Not to be pessimistic, but… we have all heard the calls for stricter environmental regulation for new development. It will be interesting to see how enhanced environmental regulation can co-exist with the promise of new infrastructure construction.
  • Litigators may also find themselves busy. As some existing properties encounter financial distress, one could expect an uptick in owner-contractor litigation, tax appeal litigation, and bankruptcy filings and foreclosures. If government embarks upon massive infrastructure projects, condemnations will be necessary.

I have no doubt that 2021 will be a better year. It can’t get worse, right?

For further information, please feel free to contact Neil A. Stein, Esquire at (610) 941-2469 or nstein@kaplaw.com.