The Gilbert Sun News recently visited virtually with five experts to discuss the residential and commercial real estate market amid the COVID-19 pandemic.
The experts included: Attorney Benjamin Gottlieb, of the real estate law firm MacQueen & Gottlieb; Kellie James, of Prime Lending Chandler; Lance Brace, of Bennett Property Management; Mary Nollenberger, a commercial real estate specialist for SVN/Desert Commercial Advisors and Angela Tauscher, a Realtor with West USA Real Estate Chandler. A related discussion is in today’s business section.
We still seem to be in a very strong seller’s market. How long do you think it will continue?
Angela Tauscher: We’re putting consistently under contract every seven days 7,000 and 8,000 homes …and we’re closing between, I’d say, about 2,000 and 4,000. I think the highest I’ve seen honestly is the 4,000 and I’ve been tracking it every single week since COVID started. ….As you know, a full-time Realtor sells maybe 20 residential houses a year. I think our team has sold 30 in the last three months. It has been crazy out there. It’s literally the Wild West.
Anything that we’re putting in under the $500,000 price point, we’re having anywhere from 10 to 30 showings in 24 hours. It doesn’t matter if it looks like a dog or if it’s the most beautiful home on the block. …More commonly, I’d say if it’s anything under probably $450,000, we’re getting 10 to 15 offers on every single house. We put in a cash offer for a $750,000 listing last week. We were outbid by a $775,000 loan that waved the appraisal.
“We have a million-dollar home right now that we had multiple offers on and they had tons of activity. So, it is challenging on the buyer’s side. We’re having buyers that are getting discouraged –especially if they need any concessions in any way shape or form, they just aren’t getting them.”
Do you see this continuing indefinitely?
Tauscher: I think we have a serious issue with our shortage of inventory. A lot of people are scared to put their homes on the market because they don’t want people in their homes. I think what happened is as people got a little more comfortable when things were opening up, they were more willing to maybe put some stuff on the market.
But when the numbers spiked, now we’re seeing some people withdraw and get scared again. So, there’s a real challenge there.
From what I’m seeing, people are stuck at home. They’re bored. There’s nothing better to do but talk about “what should we do?” “Should we add this gold-plated wall just because interest rates are so low?” “Maybe we should just sell and right now, then we don’t do refi. We get this incredible interest rate and we get a step up for the exact same payment of what we were already working with.”
Ithink there’s a massive urge to move out there right now. We just don’t have the inventory, which is creating the stoppage. However, I think the whole (mortgage) forbearance thing that went out there early on, there was a lot of miscommunication and I think when those catch up – in 18 months or two years – I think we’re going to start seeing some situations with those people. Maybe Kellie can speak to this whole (mortgage) deferment thing.
Kellie James: I was on a market update call and 435,000 people that were taking advantage of forbearance caught their mortgages up in just the last week. …I did talk to clients that had money that chose a forbearance option even though they didn’t need to.
My caution is, you’re going to have to catch up on these payments and so those that cannot, it’s really more giving the client time to sell their house. If you can’t afford the house, it’s not a free pass. It’s giving you time to sell it without damaging your credit if you are not going to get your income back.
Then the question becomes where are you going to go. But we don’t think that interest rates are going to go up. For some reason, they’re not really following the normal trend. As the stock market goes up and gets improved, our interest rates should go up a little bit. That’s not happening, maybe because of all this liquidity the government is injecting into the market.
Once we get a vaccine or some light at the end of the tunnel, that is when we expect that the rates will go up. But who knows when that will be?
Lance, you’re on the property management side. How would you assess the current state of the rental apartment and housing market right now?
Lance Brace: The prices are going up pretty quickly even through the last couple of months. A lot of my clients have opted to be more cautious, trying to keep their existing tenants in place. So, we haven’t been asking for big rental increases on existing rentals.
But with new leases put on the market, we’re seeing increases upwards of about 10 percent on single-family houses. I have houses that 10 years ago I was leasing for $600 and are now leasing for $1,500. So that’s a huge increase, obviously, since the recession.
How about forbearance on the rental scene? Have you seen a lot of people asking for some time to catch up on their rent?
Brace: I have seen an increase in tenants asking for payment arrangements to pay the rent for the month. We’re not charging late fees right now because of the governor’s executive order. When this all started, we made the decision that we didn’t want to participate in an eviction crisis, seeing as how many people were going to be out of work and especially in the lower-income rentals… I manage about 140 properties. I have had an increase in the number of tenants asking for payment arrangements, but so far, I’ve only had one go into the following month before they had made the full payment….We’re not seeing a huge increase in delinquency where tenants are not paying other than just making payment arrangements.”
Ben, with the feeding frenzy out there to buy homes, do you have clients who buy a house sight unseen and then have buyer’s remorse once they walk in?
Ben Gottlieb: As a law firm we tend to see things when they go bad. We don’t get the cases on the front end where they’re seeking our advice. We typically get it on the back end when there’s a seller non-disclosure issue. We are seeing a reasonably constant flow of non-disclosure cases. Even prior to the pandemic though, that’s normal.
What about on the rental side as far as nonpayment of rent is concerned?
Gottlieb: A lot of landlords and tenants have entered into payment plan agreements, whether it’s a partial payment plan or some other payment arrangement. Even though landlords technically have the legal right to file an eviction lawsuit during this period that the executive order is effective, many landlords are opting not to because they know that they cannot forcibly dispossess the tenant….
We’re seeing landlords wanting to be strategic on this, like Lance alluded to, and avoiding filing eviction lawsuits if they can try to work something out and not throw someone on the street during this difficult time.”
What about for the landlords, what’s their protection?
Gottlieb: On the federal level, the suspension of foreclosures in federal mortgages has been extended to Aug. 31. …On a statewide level, I think one of the big issues is that there is a $5 million rental assistance fund that the landlord could have gone back to get some assistance but that money has been slow to get out. One of the issues is that the stimulus money is not getting out to both landlords and tenants quick enough.
What about commercial tenants?
Gottlieb: On the commercial side, things are a lot different when it comes to evictions. The Legislature enacted a landlord-tenant statutory scheme that applies only to residential tenants and is designed to provide some extra legal protections for tenants.
On the commercial side in most cases, a court eviction action is not even required. Typically, commercial landlords will execute on what’s called ‘a lockout remedy,’ where they merely just change the locks. The only time a landlord commercial landlord would be hesitant to do that is if they’re concerned that the tenant may sue or have certain claims against the landlord for wrongful lockout or if the lease prohibits such a remedy.
Furthermore, you had the commercial eviction executive order that expired back in May and that is now been expired for a while. But while that executive order was in place, a lot of commercial landlords and tenants worked out forbearance agreements and other types of arrangements that are still in effect as of today, even though they were worked out a couple of months ago.
Mary, with commercial properties, have businesses been able to stay alive?
Mary Nollenberger: What we found in at least the first quarterly earnings call is that they were collecting somewhere between 50 and 75 percent of rent at that time. A lot of the restaurants that have had to pivot very quickly to take-out and delivery-only were affected but we also saw in what’s called “the triple net investment category,” which are the quick-serve and drive-through restaurants – a lot of them were posting year-over-year increases of somewhere between 27 and 32 percent.
Then a lot of the sit-down restaurants put that into place very, very quickly and even began to develop family meal take-out packages and those that implemented strategies very quickly have actually survived the reopening quite well.
What we also see in the domino effect as the landlords were provided forbearance on their mortgage arrangements with their lenders, they very quickly shared that without even being approached by tenants and offering to help them through at least that first 90-day window.
We’ve helped implement strategies with landlords to say there can be a benefit to both sides here and we’ve negotiated blend-and-extend kind of situations where the landlord can add a forbearance onto the back end of the lease or can negotiate reducing base rent in exchange for an extension or a lengthening of the lease term by a couple of years and offering kind of a menu.
Conversely what we’re seeing in some of these large-scale property owners is that there’s been a lot of opportunistic behavior on a part of some large national tenants that are just in a position where a Starbucks would say, “We’re just not going to pay rent” and walk and because they can.
So, landlords are struggling with opportunistic tenants who really don’t need forbearance and then strategizing with tenants that really do need the help them to be able to help them through this time.
Obviously, the fitness industry has been front-and-center in the media over the past month couple of weeks. And a lot of the smaller fitness users are finding ways to continue either online or in outdoor situations. Then, with PPP funding, I have a number of landlords who put tenants on special arrangements and when that funding arrived, they came back and said, “I don’t need the arrangements that we made any longer.”
How do you see the market for commercial and office space in this region?
Nollenberger: The East Valley for me is home, where I live and I do my work. The vacancy rate is just under 7 percent in those areas as opposed to other areas of Metro Phoenix that are in the 20 percent and 30 percent vacancy rates. Chandler and Gilbert are rising communities that are experiencing a ton of influx from California businesses.
For example, State Farm in Chandler – they are recruiting from 42 markets to bring employees just into that tech corridor in Chandler. Chandler and Gilbert are experiencing growth at a rate that another municipality can’t compare to.
Why is that?
A lot of the tech business placement and then housing follows those jobs. The Tempe Town Lake has huge employment expansion; Chandler has huge expansion. Chandler’s population is slightly larger than Gilbert’s but Gilbert has been voted one of the nation’s friendliest cities to move to.
There’s so much positive press for the East Valley. There’s housing and that follows job. When people from out-of-state talk about what’s happening in Arizona specific to COVID, our East Valley cities are really in a different category because of the bulk of business and people wanting to escape the California tax situation.
There’s incredible commercial tech and new jobs in the Apple Command Center and Far East Mesa in the Gateway District There’s tons of jobs. And then Eastmark has provided a great option for affordable housing but in a community that is so vibrant.
Queen Creek used to be the option for people that didn’t mind driving as far but wanted more affordable housing. Now, every restaurant, every commercial retailer that that wasn’t there before is there now. So you’ve got dining options, you’ve got shopping options. You’ve got entertainment options.
The entire East Valley is just vibrant in a different way than any other area.
Tauscher: I agree with Mary completely. I live in Queen Creek myself and have been there for the last 12 years and we used to be basically the redheaded stepchild and now it’s the place to be. I mean we have everything – from our own Harkins now. They’re building a Fat Cats. Trader Joe’s is going in the same parking lot right next to Target and Barrio Queen.
I think the thing about the Queen Creek-Mesa corridor is that there’s so much newness. It just feels fresh. It’s close to an airport for a lot of people that don’t mind taking going into one of the smaller airports. The 202 is right there. There’s just a lot of navigational options there. You go to Maricopa, which is also growing at a rapid rate but you’re trapped – one way in and one way out.
Nollenberger: From the commercial landscape view, we’ve had a lot of conversations about the future of retail jobs. And of course, it used to be recession-proof, and then it was internet proof and now it’s COVID-proof.
We’re looking at how Target spends. Target spends millions implementing inventory and digital control systems and put them in place before they needed them so that people could order online and could choose either in-store pick-up or delivery. Walmart jumped on that strategy with pickup and delivery options. Those companies are going to be rewarded for having that technology in place.
So we have to take a look at the grocers who have not implemented those strategies and how that might in long-term affect their viability….We’re looking at retailers and how they are changing strategies to not only survive but be competitive in the future with all those factors affecting their future.
Would you say that restaurants took a greater hit than small retail businesses?
Nollenberger: Absolutely. I think that restaurants are following the protocol and requiring masks and distancing, I look at numbers occupancy numbers with clients of mine.
Lease rate occupancy cost can’t be more than 8 percent and now with the decrease in their volume and having to comply with distancing and close every other table, they’re having to look at strategies to increase their monthly cash flow opportunities, and how are we going to navigate this. When you look at that business owner that is complying and then a bar that has no social distancing protocol going on, a survivability factor can’t be equal when the conditions are so different.
How about office space?
Nollenberger: Office space is going to go one way or the other – it’s not going to be static. Either office space is going to go larger to provide different spacing and cubicles are going to have to be sequestered to provide privacy or they’re going to downsize because people are going to continue working remotely.
With the increase in remote working, do you see a change in the demand for office space in the region?
Nollenberger: Buildings are pretty committed before they ever go vertical. There’s very little office space that’s built speculatively. There are a lot of people that want to reach out to their office setting…There are people who can’t wait for that – for office to be office and home to be home.
What is the state of strip malls in your experience?
Nollenberger: With every crisis comes an opportunity. There are a number of investors that thrive in a down market and that’s where all of their purchases occurred and they are not in their most driven mode when the market is where it’s been with contraction. …
There was a time when being a grocery-anchored or big box-anchored was just preferential and honestly now for many investors, part of being internet-proof is having smaller spaces and not about the anchor and junior anchor space being vacant.
We just sold an unanchored Scottsdale site. It was under contract within two weeks of our listing and it closed 30 days early.
I was on a conference call with an investor yesterday who said, “When I saw this post card and that this property was sold, I realized that I missed this opportunity.”
New home construction: I’ve read that that’s not keeping up with demand. Is that still going to pose a struggle for people looking to buy a home?
Tauscher: We just put two different clients in a new build in a Fulton Queen Creek. The sales guys were telling me they’d been open like six weeks and they’d already sold a hundred homes. We’re seeing the same thing everywhere. with the builds. It is unbelievable….If they start out with five lots available, they’re probably not going to have five lots available by 3 in the afternoon. It truly is a problem.
I think part of it is that we don’t have enough and I think part of it is, again, people are bored and they figure well, they have nothing better to do because they’re all working from home.
So, they’ll just go take a lunch hour and they just want to go see a model because it’s fun and they literally can make a field trip of it. …They go in there thinking “I’m not going to do a new build” and they fall in love with the staging and the next thing you know, they’re signing a contract and they’re buying a new-build. …Now, there’s that weird timing issue where we are having a lot of people needing short-term rentals because the builder wants that house sold within the next week or two of going under contract and the home’s not going to be ready for six or seven months.
There’s not a lot of great viable options for people to go to so there’s been that a disconnect for short term rental situation.
It seems though from both the commercial and the housing side that at least the East Valley region is a little bit better positioned even during this pandemic than a good bit of the country. Is that safe to say?
James: Absolutely I can work 24 hours a day.
Brace: What I’m seeing a lot is increased demand for four-bedroom houses in a rental whereas before it was three bedrooms. …I’m having people calling me asking if they can install secure phone lines and things like that so they can take credit-card payments. I’m really seeing that across the board and I think that moving forward, we’re going to see increased demand for bigger houses in rentals because of that: people needing office space.
Does the uncertainty surrounding this virus concern you long-term?
Brace: I don’t have any fear about that, largely because people always need a place to live…At the end of the day, there’s always going to be demand for rentals. That’s why I personally invest in rentals myself.
Tauscher: I feel the same way. …I spoke with one of my investors yesterday who owns a small Chinese-food restaurant. He said he made that conversion very quickly to get the food out in a different way and he was terrified that first couple of weeks, but he said ‘I’ve had more banner days in the last two months’ than he had in the last 10 years of being in business.