The Pandemic Impact on Real Estate and Business Valuations with Sam Smith

The Pandemic Impact on Real Estate and Business Valuations with Sam Smith

The Pandemic Impact on Real Estate and Business Valuations with Sam Smith

Ed fields a lot of calls from business owners that own real estate and they want to know, what do we do here? What’s the effect of this pandemic on our real estate? Are we going to be able to sell it at fair market value? What does the future look like? What does the buyer have to look like in order to buy it in an environment like this? Ed contacted one of his buddies in the commercial real estate industry, 

Sam Smith of Resource Commercial Real Estate, and had a visit about what real estate look like today. Sam is the chairman and co-founder of Resource and leads the company occupier services. Sam handles all the sensitive renewal negotiations achieving multimillion dollar client occupancy cost savings. He conducts National Site Searches, prepares sophisticated market analysis, assemblages and manages the team consultants, evaluates alternatives and negotiates favorable and significant economic development incentives. Sam constantly uses proven processes, superior market knowledge and strong negotiation skills to help clients achieve below market and flexible lease purchase terms and attractive functional and efficient space that enhance employee productivity and shareholder value. All that means is that, if there’s one guy in this community that you go to for commercial real estate, it’s Sam. 

Enjoy this conversation with Sam Smith!

2:40 – Can you tell us a little bit more about you, RESOURCE and How when you’re serving business owners?

4:12 – Is this the only job you’ve ever had?

5:22 – What do all those initials after your last name mean?

8:11 – How are people that have the capital approaching real estate deals during this time of the pandemic?

10:53 – What comes next when there are challenges for lenders?

12:32 – What will the landlord do in situations where 60% of the practices now are virtual due to COVID? 

17:48 – Is it a good time to start buying up retail businesses that are floundering because of the pandemic?

19:52 – What does REO stand for?

22:03 – What will the increase in interest rates do to buyers, sellers and investors that you guys represent?

25:02 – What landlords should look for to attract some good tenants?

26:09 – What is new apart from that list?

29:35 – What’s the biggest threat to your practice in this post crisis environment?

33:30 – Which capabilities, relationships and assets become important post crisis?

35:25 – Is it better to hold the real estate and leaseback to the buyer with an option to buy or is it better to sell outright? 

38:39 – What is your forecast in the next few years?

42:10 – Do you guys offer other services?

43:14 – What does your typical client look like?

44:05 – What process do you use to help clients?

45:08 – What would be the one piece of advice to give our listeners that would have the most immediate impact on their business?


Show Notes

Can you tell us a little bit more about you, RESOURCE and How when you’re serving business owners?

Sure. I’m very fortunate to have a 40 year career doing something that I truly love. I like to say it was great planning but it was a summer internship in September of 81 that turned into a 40 year career. We recently played at my company again called Cahoots which is ready for team building and they asked me about my dream job and I said chairman of Resource Commercial Real Estate, central and largest locally owned and independent firm. And I like being David and competing with Goliath in our industry. I enjoy helping clients get what they need, and I truly enjoy helping employees grow and Excel, which are two of our core values. I am and we are essentially management consultants for our clients much like you, we really try to understand the client’s core business drivers and challenges and then use real estate to help enable enhance accelerate their business. Sometimes that means creating better access to the right labor pool or proximity to customers. For others that might be more efficient space to enhance employee productivity. The key question today is how much space do they really need and where? Another question is cost which is becoming more of an issue today because of the recession. A greater need today also is these purchase flexibility, as this is a very dynamic business environment and COVID makes these decisions even more critical to the overall success of the enterprise.

Is this the only job you’ve ever had?

No, I started when I was a young delivering paper certain routes and mowing lawns and shoveling snow and raking leaves and working in the garden. The garden just sounds pretty simple, but I had to plow the field. We had tomato plants that were taller than the house. We needed a two by fours. This is not Paul Bunyan. I’ve had a lot of jobs over the years as a kid, but my first real job was working at what was then Como Banker Commercial now CBREs.

What do all those initials after your last name mean?

I’m a CCIM, an SIOR, an SLCR and an MCR.W and they’re all actually very foundational to my success. And I’ll tell you what each one briefly means. CCIM is really the MBA of commercial real estate from the financial side. It’s a training program that’s recognized as kind of the industry leader for that. SIOR is the industry leader for, I would say doing deals for office and industrial brokers, and you have to have a certain level of experience to achieve both of those. This SLCR and MCR.W are designations in a certificate through the CoreNet Global, which is a corporate real estate organization, the largest in the industry. And what they all mean is that I’m a student of the industry. I believe in lifelong learning, and its part of our company DNA. To be the marketing leader helps to be the thought leader. To do that, one must train extensively. It’s just like athletes; it takes 10,000 hours to become a master at anything. And most overnight successes, as you know, have years of experience and training behind them. My goal is that all of our advisors have at least one industry designation and ideally two or more. And that’s why I recently hired a vehicle to head up our training and coaching. He’s a CCIM instructor and a maximum coach, which are two of the, again the industry leaders in those fields. And we invest very heavily in training our people so they can better serve clients.

How are people that have the capital approaching real estate deals during this time of the pandemic?

We’ve got different folks that touch real estate and they all have different ways they’re reacting, but generally they’re working together. So tenants who have had disruption to their business, have challenges and they’ve gone to landlords and said, “Hey, can I get some rent relief or maybe a rent deferral?” Most landlords, many landlords are cooperating in that endeavor. At the same time, they’re running immediately to their bank or lender and saying, “Hey, we’ve got this COVID issue; it’s affected some of our tenants. I need forbearance or some relief on payments for a little while. Can I get a three months or six months deferral of the mortgage payments?” And then the bankers go to the Fed and say, “Hey, do you want to buy these loans that may or may not be perfect?” And the feds has been very aggressive about that. So it’s one big happy family right now, but that’s during the time where we have PPP and a lot of money flowing. 

The challenge will be when the money stops. So right now lenders are very careful about whom they’re lending to, and I’ve been watching many industry webinars and reading white papers and trying to read the tea leaves and most lenders it seems are working with borrowers for referrals and that kind of thing. And they tend to be concentrated in affected industries like retail, hotel, assisted living and some office. Investor on the other hand has been largely un-impacted and possibly seen growth because of it, they move to ecommerce would be an example or COVID related equipment needing storage would be an example. Apartments have been very solid to good through this entire time. Office has been impacted, but the real impact will be when tenants decide whether they’re going to renew or not. And at what size that might be in three to five years. With layoffs downsizing, consolidations, business failures and work remote strategies, they will all have a big impact on the future of office demand, and therefore vacancies, rents and values. So right now, there are a lot of lenders that are hitting pause and looking at their portfolios to try to determine where they might have problems and the challenge is the money still flowing. So they don’t really know until the money stops and when that happens, I think you’re going to see a lot of challenges for lenders.

What comes next when there are challenges for lenders?

The next step is, my prediction will be a federal bailout, but in the short term, the Fed is buying a lot of loans from banks. They’re essentially they’re even buying corporate bonds, they’ve announced. So essentially the feds trying to ease the credit situation by buying up all the debt, some of which I’m pretty certain it’s going to be bad debt, and so the government at some point is going to pay in a piper, but right now they are helping banks to keep the capital flowing. But even with the Fed buying their loans, they’re not necessarily lending because again, some of them put it on hold and said we’re going to wait and see. It’s like catching a falling knife. Do you want to make loans now when the values of properties might fall by 20% in 12 months? It depends with the industry.

What will the landlord do in situations where 60% of the practices now are virtual due to COVID? 

First I would tell you that I think a lot of tenants without all the things the Fed is doing and Congress did in terms of stimulus, there’d be a lot of dead companies right now, my opinion. The bailout was for basically April, May, June and then you can stretch it, but most people like my company, we’ve spent the money, most of it, so it’s nice to stretch out, but most of it has already been spent. But there are some states and city restrictions against evictions and you’re totally shut out. So when tenants can’t pay their rent, their landlords can’t necessarily boot them. In California, they wanted to ban evictions, meaning every tenant would never have to pay rent. And that’s wonderful if you’re a tenant. It’s problematic for the landlord. And so the government essentially would make you partners in the stimulus package. And luckily, that fell to become law, but there are many programs like that that are being proposed and right now there are city and state regulations that say you can’t evict.

There are many programs, federal state, City County to assist target businesses and individuals you’ve obviously shared some of those on your program and that being said, if eviction were legal, most landlords or many of them are working with their tenants and banks are working with their borrowers, and again, the feds working with banks to make this whole thing continue to grow. Maybe not all the tenants have, or your clients have hit the skids. But I will tell you what I’m saying 25 or 30% of restaurants, retail, hotel, and then travel industry. So there are a lot of industries that are going to be materially affected. And then use office as an example, if you’re doing work by remote, there a lot of large corporate downsizings I think you’ll see five or 10%, less demand in office maybe 20%, but a significant profit office demand, which will at some point landlords rent rolls vacancies, the disruption of tenants go bad, will eventually flow through to the cash flow, which will through to flow through at some point to lenders which will create opportunities at some point, but right now sunny days are here again. I did pull up a little information, there’s a nay read all read index and they track rent being paid, collected rent and for industrial April is 99.7%. And it has slipped to June to 97.8%. 

Apartments similarly were actually worse in April, just under 90%. Now it’s at 97 and a half percent in June, office collections were 94.3 up to 95.9, healthcare 87.3 but at 95% today, but if you look at — and those are like medical office buildings, but retails 72% to 79 and shopping centers, which would be more the larger retail 45.9% going up to 60 and a half percent today and then you’ve seen all the bankruptcy sales and the retail world. This is all going to flow through, hospitals have suffered tremendously because of COVID. They’ve essentially shut down most of the hospital except for the COVID ward. So all the revenue streams that they would have from surgery and other things, they’ve lost that. So these things will all flow through the economy, it affects GDP, it affects consumer spending with this situation where people see a recession, they save money so that they’re prepared for a rainy day kind of situation. But that’s really bad for retailers and the general economy and GDP because people aren’t spending, they’re saving, which is good, but the negative is then the retailers and businesses that rely upon those sales are slowly dying. And in addition, governments that rely upon the sales taxes and income taxes are also struggling tremendously.

Is it a good time to start buying up retail businesses that are floundering because of the pandemic?

I think what you’re going to see is winners and losers, so there’ll be some new concepts that will fill in some of the retail like a mall is going to have a bigger entertainment component, they will be wrestling. The world is going to be different in retail and it will be a lot of creative reuse of retail, could be office, could be some other — there was just announced a recent co-working deal and I’m all here locally. I think you’re going to see on a creative use of larger mall space. Lafayette Square is targeted to be knocked down and become an industrial park. So the world is changing, commerce is growing, traditional retail shrinking, so you better have a good concept. My concern with the whole thing when you look at across not just the retail but the other sectors is what’s going to happen in November, December, January when the relief runs out. What will collections look like for landlords? I believe that PPP and other stimulus programs are temporary bandits, potentially masking a bigger issue that could manifest after the stimulus stops. The biggest issue I see is how to get 30 or 40 million people back to work. And those new jobs may be in new industries requiring new skills and training. My forecast is probably a little less rosy, most would say I prefer to say that I’m more realistic. But I see a U shaped recovery not a V, I see longer than three to six years, I see more government intervention and banking and lending and maybe a job program or two. And for real estate, that means a lot more REO property and potential discounted distressed investment opportunities for buyers. So there’s always a silver lining, unfortunately, because of the distress of others.

What does REO stand for?

Real estate owned, it’s where properties go back, bank to a bank or a lender, typically want to dispose of it and take their lumps and write it down and move on. 

What will the increase in interest rates do to buyers, sellers and investors that you guys represent?

Advice would be refinance now, buy now because the money’s cheap. Right now banks and lenders are borrowing massive amounts of money from the Fed at zero percent and loaning it out for a handsome profit. But it’s still historically low rates. They have minimum rates that they require. They’re not loaning it out at zero percent. They have a solid profit. Long term and short term interest rates will increase and we’ll have inflationary pressures when this is all over, the feds printing money at historic rates. Eventually we’ll have to pay the piper and that will mean higher taxes pay down the debt. When the Fed stops printing money like a drunken sailor, credit will become tight or tighter I should say maybe not tight. But it will impact commercial real estate cash will be king. Those with clean balance sheets and lots of cash will be able to make it. I think that probably applies to your business as well. If you’re in a position to buy businesses, it’s an opportunistic time to buy.

What landlords should look for to attract some good tenants?

With COVID, safety is first, security, amenities, image, efficiency, competitive cost because of the recession. Most tenants want good access to highways and amenities and homes. And then flexibility is a really critical thing that I think of growing importance because of this recession. It’s a dynamic business environment and tenants want a little more flexibility to make changes to their space and maybe signs of space. So maybe an option to cancel or an option to downsize or shorter term lease things that can give them flexibility for their business, those needs may change over time.

What is new apart from that list?

Safety is more critical today than before, obviously. And then cost because of recessions, more critical, growing market kind of had a booming economy for really a 11 year recovery or 12 years, whatever it was. Now, people are very focused on cost. Cost is critical. If you don’t manage your costs, you might get a business. Now a driver in the backseat, they’re not talking about growth, I’m talking about cutting back. So flexibility again, landlords who put in tenants improvements and spend big money to build out spaces that cost a little more cost of construction would like a long term lease, tenant would like to have at least like a hotel, or they can get out every other night. So it’s that battle. But I think landlords and tenants that tenants need more flexibility today because the world is changing. I mean, if you track COVID and what’s happening and the recession, it changes daily. And so being able to change is, I think going to be a lot more critical going forward. And your amenities will be different. 

I’m in an office park where they have nice amenities, but they’ve all been closed for forever. A restaurant won’t reopen yet, but they’re going to put food trucks out there and the gym is going to be at 50%. And the conference rooms, I don’t even know if they’re available. What people want will change. What I don’t think they want, in New York City power where you’re 100 stories up and you’ve got to wait for an elevator for two hours, an elevator line takes a lot for cruising up to the time or whatever. So, I think it’s going to change where people put off a space and not just office, but locate real estate. And I think you’ll see that good pretty America, and maybe a little more distributed workforce. When you found out you could work anywhere and you’re sitting in San Francisco, living in a shoe box paying three times four times what it costs to live in Indianapolis, could you do your same job in Indianapolis? We may not have all the amenities that San Francisco has, but you can live like a king for the same amount of money they’re being paid in San Francisco.

What’s the biggest threat to your practice in this post crisis environment?

The biggest threat to entrepreneurial firms like ours, maybe like yours, is getting squeezed by recessionary pressures on one end. And then in our industry, we have mammoth competitors. They’re all multibillion dollar companies global in nature. So we generally compete against giants. We don’t have as many local competitors, there are few but it’s us against the world and the world’s best. And so our answer, which is counterintuitive, is to grow and continue to lead as opposed to shrinking. We have a lot of competitors and industries, not necessarily just real estate, that the answer has been down the hatches and wait for this to blow over. And we’re adding talent that suddenly has become available. We’re investing heavily in training tools, technology to better serve clients. We’re staying ahead of competition by investing in at a time when a lot of people are cutting back, cutting people and cutting corners. 

We see a huge opportunity where others maybe see fear or are afraid to trend. It’s like, do you run from the fight in the storm or do you run to it? So we provide value added services such as development, project management incentives, with research capabilities and market intelligence second. What we do differently is we’re I think a lot more nimble, innovative and flexible for clients than the global bureaucratic behemoth can be, just due to their nature, it’s hard to turn around the Titanic on a dime. We also hustle and use proven processes to help clients maximize their investments and profits by minimizing risk. Minimizing risk is today is probably more important than it ever was. We’ll always be successful; we put our clients first and help businesses succeed much like your business. Our mission is to make a meaningful difference for clients employees in our community and we do that every day.

Which capabilities, relationships and assets become important post crisis?

Pivoting is a word you just said earlier; it’s really a key word. It’s what we did before appropriate for today or do we need more change, do something different going forward. Being nimble is very critical. That’s why you deal with a lot of entrepreneurial owners, and they’re used to making changes and the key is, the economy and environment is so dynamic. Being flexible is really critical. Having access to capital for growth is important. There will be, I think, and in your industry as well, huge opportunities for clients. Talent is really what makes our business and industries go. So that’s really the most critical thing. It’s the people. We’ve been focused on adding the right people in our collaborative culture and who believe in personal professional development to become the best advisor or service provider possible. We also focus on diversity, we value the entrepreneurial spirit that Americans build on, our big global competitors, I would respectfully say that they’re much like the US government, they’re very large, but they tend not to be as flexible and entrepreneurial. And that spirit is now needed more than ever to grow our way out of this mess. So we need entrepreneurs to add jobs and to grow.

Is it better to hold the real estate and leaseback to the buyer with an option to buy or is it better to sell outright? 

The answer is it depends. We have to ask the clients a lot of questions, that’s a cheap way out. We ask a lot of questions and then do a pretty good analysis of owning versus leasing. And there are many soft issues behind the numbers. It can be a great way for a seller to double down on the sale of the business by maintaining a nice cash flow from the firm they’re selling. So not only do they get the cash from the sale, but they also get this income stream going forward. And then of course, they still own the asset on a reversion down the road. So maybe they sell it to them down the road as an example. So we have several experts on sale these facts and structuring such things and we get in and we’d have to ask them a lot of questions. So every owner has different goals. And the goals really drive whether it makes sense or not, and what their alternatives are for investing those dollars.

What is your forecast in the next few years?

I see a extended recession, a democratic president, higher taxes, more social programs, more regulations on business, bank bailout, a lot of REO properties becoming available, higher inflation, higher interest rates, and despite all that, it sounds like I’m really ready to go out and jump off a tall building. But I see huge opportunity for entrepreneurial commercial real estate firms to thrive in this environment, because of the many challenges our clients face, they’re greatly in need of knowledgeable, talented, experienced and innovative, technologically savvy, value added commercial real estate advisors who offer them creative solutions that help them maximize profits and mitigate risk in this dynamic environment. So we are pivoting our business to capitalize on that. It’s been said that one man’s trash is another man’s treasure. John Adams said every problem is an opportunity in disguise and we really believe that, so we’re looking in REO. Blanton extends lease restructurings, consolidation subleases helping out lenders, borrowers, tenants, business owners survive and prosper. There’ll be a lot of opportunities to profit from those challenging situations for a competent advisor.

Do you guys offer other services?

Yes. So an example would be we provide development services, construction oversight, project management, we do asset resolutions, we stabilized properties, obviously acquire dispose of properties, property management, capital markets, we do a lot of work in that area, investment property sales, and then we do what’s called corporate real estate or corporate solutions where we help companies across geography with their real estate acquisitions and dispositions. We can provide lease administration services; we have a separate route that doesn’t center procurement, also site selection, labor analytics. So it’s a pretty broad array of services that we provide clients. And we’re now getting into development business as well and so we can kind of help clients from cradle to grave depending upon what their needs are. We just try to wrap services to help them make their life easy and achieve their goals.

What does your typical client look like?

Typical client would be a business owner, a business leader, typically would be 10 plus employees, ideally 100 plus employees, but we do a lot of work with small businesses and help them grow. So we provide a basket of services to a client that generally doesn’t have the in house resources. And so we can provide some really great advice as well as information as well as services and then free them up to kind of run their core business and not be distracted by the hassles of commercial real estate.

What process do you use to help clients?

We’re a lot more like a business consultant. There are a lot of people who are in business that I call cab driver brokers, anyone can find space, but we really try to help companies grow their business that’s much more comprehensive and entails more strategy and services today to help them achieve their goals. Obviously, risk mitigation is critical today. And it starts really with a detailed needs analysis so we can understand our client’s goals in business and then we wrap our strategy and team and services around that.

What would be the one piece of advice to give our listeners that would have the most immediate impact on their business?

Today, I would highly recommend that they take stock of their business model. And that means evaluating their market place, it’s likely changed, possibly fundamentally long term. And what worked before I don’t believe is necessarily going to be good enough going forward for many companies, many industries. And so the question is what are your challenges and opportunities? And it’s important to determine what needs to change, what do you need to do differently in order to maximize profits and minimize risk going forward? And then you identify the right strategic partners or advisors who can help you get there.

Connect with Sam:

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Cell – 3173455616

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