Real Estate Principals Roundtable Looks at LA Market

EisnerAmper hosted its Real Estate Principals Virtual Roundtable for industry leaders who are doing business in Los Angeles. The panel was moderated by Todd Hankin, audit partner and leader of EisnerAmper’s West Coast Real Estate Private Equity Practice. The event brought together real estate principals and leaders to share their experiences and insights navigating the complex operational, financial and organizational issues of doing business in this dynamic environment. Todd engaged attendees with a series of timely questions:

How have you been navigating the current environment?

For those launching a debt fund, there’s a trend toward being more conservative on the asset class willing to lend against, and deals are being underwritten with lower loan-to-value ratios. One of the challenges is: “What is value?” Is it the pre- or post-COVID-19 value? Various steps can be taken now, while the economic forecast remains uncertain, including lowering the loan-to-value; reducing loan amounts to a certain threshold; limiting lending based on prime real estate locations; and hitting pause on lending on land (even if its entitled), ground-up construction, and hospitality and discretionary retail. Currently, demand is high and there are more loan requests than can be accommodated.

For those in the construction industry, the current environment is causing significant disruption. It is much harder to obtain supplies and fixtures because many of the materials come from China. The process is becoming more cumbersome, and timelines are being extended with increased complications and delays at the city due to transitioning some processes virtually (i.e., inspections).

How is the current environment affecting rents?

In terms of workforce housing, rent collections were higher than forecasted during May 2020. In April/May 2020, residential multifamily rents were surprisingly healthy as well. In April 2020, the collection of billable rents averaged 96% and tenants placed on payment plans averaged 2% to 3%. As of the third week of May 2020, rent collections averaged 92.5%, which are ahead of April collections.  

Geographies – The health of the rental market is partly influenced by property locations. Looking at certain geographies, Orlando rent collections were slightly higher than Las Vegas, with Los Angeles being the lowest performing market among the three locations. The latter was attributed to several factors, including a higher cost of living and the current political climate.

Asset Classes – Hotels and retail are the most distressed class of real estate assets in the current environment. One hotel owner reported a 10% occupancy due to the current environment. While industrial and multifamily are faring relatively well, the office asset class is facing liquidity issues from a capital market perspective. 

Looking at the multifamily residential asset class in Los Angeles, among the group of roundtable attendees, Class B has performed well and Class A rent collection is averaging close to 80%. While some tenants are unable to make rent, some real estate owners attribute this low percentage to people gaming the system in response to the California governor’s mandate that prohibits landlords from evicting tenants for nonpayment of rent. 

Is anyone currently doing deals or on the lookout for specific opportunities?

Despite market uncertainty, investors are still on the lookout for deals based on low asset pricing and low interest rates.

However, it can be challenging to complete a deal at a time when loans are difficult to obtain. There are instances of some lenders being incapable of funding projects in a pandemic environment. At the same time, chances of securing a loan greatly increase when working with a financial institution that prioritizes an existing relationship. One developer who took the latter approach shared their experience of being able to close on a construction loan to fund a multifamily development project during COVID-19, with all of the draw requests funded in a timely manner. 

How will your business transition back to the office?

Businesses are currently navigating through the various factors at play with regards to when and how they will transition their employees back to the office.

Pre-COVID-19, location was pivotal and employees wanted to live in close proximity to the workplace. With some companies offering flexibility to work remotely, location preferences may change. Companies with work-from-home flexibility will have an easier time attracting and retaining employees.

Real estate will need to expand and adopt more advanced technologies beyond video conferencing.  Business decisions, as they relate to employees going back to the office, also need to consider if employees are commuting to work using public transportation and the safety impact. Safety and well-being will remain a top priority among employers moving forward.