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TRYING TO PREDICT THE FUTURE REAL ESTATE IN THE NEW NORMAL

5/16/2022 | Articles & Alerts, News & Resources

                Casey Stengel once said, “never make predictions, especially about the future.” I will temporarily ignore that wisdom. Nonetheless, the predictions that follow are pure speculation. The future of commercial real estate, at least for the remainder of 2020, may depend upon whether you consider your glass to be half empty or half full.

                If you are a “glass half empty” person, you will embrace the inevitable conclusion that the economy is already in a recession.  As a result, some commercial transactions will get delayed or deferred, while others will not get done at all. As the recession continues, perhaps even worsens, many more landlords and tenants will be compelled to renegotiate the terms of their leases, particularly the payment of rent.  Even with rent deferrals or reductions, many smaller businesses will not be able to survive. Many small to mid-size retail centers will see higher vacancies, making it difficult for owners to meet their debt obligations. Local government will not escape unscathed.  With Pennsylvania construction activity in shutdown mode (at least for now), state and local government will see a dramatic drop in income from permit, inspection and impact fees, transfer taxes, and real estate tax revenue typically generated by new development.  State and local government will need to identify more creative mechanisms for raising revenue.

                If your glass is half full, great opportunities are ahead. For those investors looking to buy or refinance, interest rates are at historic lows and will be for the foreseeable future. Inflation is not a concern. Pent up demand for housing will help the economy recover at a rapidly fast pace. If the mortgage market tightens, apartment development will see a new infusion of capital from private equity.  For developers, state and local government, hungry for the income generated by new development, will expedite land use approvals. Existing businesses that do survive will have a plethora of space to choose from, at very competitive rents

                Even non-French speaking real estate professionals are learning the meaning of “force majeure”, which excuses or permits delay in performance under certain circumstances. Force majeure means “greater force.” Force majeure events are often defined to include political events such as wars, strikes, lockouts, terrorist threats or actions, and acts of God or act of nature, such as hurricanes, floods, and earthquakes. Generally, asset diminution, financial reverses, or general uncertainty about the future are not force majeure events, though a lender may consider such events in making financing decisions. Courts will be called upon with greater frequency to decide whether vague or ambiguous document language will constitute a force majeure event.

                Experienced commercial real estate lawyers will be busy. Lease modifications, debt restructures, and force majeure disputes will be prevalent.  Income-producing property, facing a substantial reduction in rental income and fair market values, will lead to real estate tax appeals.  Opportunistic investors will need counsel when raising private equity to buy devalued assets. For developers, the land use process is stalled.  However, with some municipalities continuing to process permit applications, and others embracing virtual meetings, the process should ramp up soon. The current problem, at least in Pennsylvania, is that private construction is not permitted. 

                Whatever the level of water in your glass, all we can do is hope for the best. 

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


Related Practices: Real Estate Transactional