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3 Areas Of Real Estate To Watch In 2021

By Andrew McIntyre · 2021-01-03 12:02:26 -0500

Much of the focus among commercial real estate experts in 2021 will be on the ways COVID-19 will continue to shape the sector, and lawyers say there are still many unknowns on that front.

For one, it's unclear how disputes between landlords and tenants will play out this year, particularly if various moratoria on evictions are lifted.

But there's also the question of how conceptions of space needs and work-from-home models will unfold, and changes there could have a marked impact on supply and demand equations for certain asset classes.

"There will be certain changes that transcend the pandemic and are the result of changed habits," said Mark Fawer, a partner at Greenspoon Marder LLP.

And all eyes will also be on Washington, D.C., as the Biden administration could make changes to various federal laws commonly used by developers.

Here, Law360 looks at three areas of real estate that lawyers will be watching next year.

How Will Landlord-Tenant Disputes Play Out?

One of the major through lines of 2020 in real estate has been the continuing question of how landlords and tenants are dealing with the problem of many tenants not being able to pay rent amid the pandemic, and lawyers say landlords may get more aggressive with enforcement in 2021, particularly if moratoria on evictions are lifted.

"One of the trends you're going to see in 2021 is that lenders and borrowers will need to address the reality of the situation when it comes to many of the commercial properties, especially hospitality properties and hotels," said Robert Grados, a partner at Pillsbury Winthrop Shaw Pittman LLP. "In 2021, on the financing side, you're going to see lenders be, if not more aggressive, definitely more deliberate in determining whether a workout is possible or whether it's time to foreclose. … I think that there will be a reckoning as tenants realize that they are just unable to make their rental payments."

Lawyers say parties thus far have largely been trying to work out compromises, with some reaching deals for tenants to pay reduced rent or for tenants to receive abatement for a period of time.

"Landlords and tenants have really tried to work together so that the tenant can pay what's reasonable," said Gayle Klein, a principal at McKool Smith PC.

Various states, including California and New York, have put in place moratoria on evictions, which has created time for parties to try to work out their disagreements, but it's unclear how evictions may come into the picture in 2021.

Landlords also face the related challenge of making their payments to lenders. And as the pandemic drags on, experts say it may be harder in 2021 for landlords to reach agreements with tenants as owners face pressure from their lenders.

"Some of those modifications will turn out not to have been enough," said Diana Brummer, a partner at Goodwin Procter LLP. "Some lenders are not going to be willing to give borrowers … long-term or greater relief. I do think we're going to see an uptick in distress."

How Will Uses of Certain Asset Classes Change?

Another key question the pandemic is raising is what sorts of changes will remain once a vaccine is found, and experts say many companies will realize they don't need as much space.

That could then create oversupply issues.

"Every business … is looking at an existential awakening as to whether or not the need for all their retail or commercial space is actually required to maintain their productivity and their job functions," said Jason Vanslette, a partner at Kelley Kronenberg. "Everybody is trying to figure out what effects on commercial real estate COVID-19 is going to have."

As parties try to figure out what the new normal will look like, many investors and developers are shying away from retail and office, while multifamily remains attractive. In short, it's not clear what sort of demand there will be for retail and office.

Investors who "were in retail, office, they're jumping into or trying to get into the multifamily space," said Kevin Grossfeld, a partner at Saul Ewing Arnstein & Lehr LLP. "We're big on multifamily. A lot of retail and office clients, people that I've spoken to, are scared of what's to come [for those sectors]. Some people that were thinking of developing ... have pulled the plug."

And on the hotel side, the demand question is even more stark. Experts expect to see some hotels close and others be repositioned for other uses.

Developers may look increasingly to convert existing hotels to apartments or condos, and experts say to the extent that new hotels are built, there may be more of a push to build those close to medical centers as firms eye potential demand for hotel rooms close to medical facilities. Offices could also be part of the mix.

"We're starting to see hotels shut down permanently in New York," said Michael Rishty, a partner at Davis Polk & Wardwell LLP. "Owners, developers, investors are looking for ways to repurpose hotels."

What Will the Biden Administration Do?

While the pandemic has been a major focus for most of the year, the real estate community has more recently also been looking at what changes it may see next year under the upcoming Joe Biden administration.

One question is whether the administration may change or eliminate the 1031 Exchange program, a popular way for investors to reinvest sale proceeds into a new property and in doing so defer payment of capital gains tax. That question may hinge on the control of the U.S. Senate, which will be decided by two Georgia elections this week.

"It remains to be seen whether there can be common ground on that in Congress," said Brian Lichter, a partner at Davis Polk. "What I'm hearing is a lot of people [in the real estate community] are happy about divided government and there are likely not to be many changes if there's a divided Congress."

Experts say cutting the 1031 program could hinder deal flow. Bill Kramer, a partner at Brinkley Morgan, said eliminating the program "would have somewhat of a negative impact on real estate prices and the number of transactions."

Another question is whether the opportunity zone program could see changes. There is talk among some Democrats in Washington, said Saul Ewing partner Ronald Fieldstone, about changing the program such that it couldn't be used for projects such as luxury residential and self storage.

And the EB-5 program is also always on the radar of commercial real estate experts, and lawyers say next year could see changes to the program, particularly on the question of easing some immigration restrictions. Many investors at present have to wait a dozen years to get their green card, a wait time that has ballooned over the past several years.

"In calendar 2020, there were just a couple hundred of EB-5 applications that have been filed. That's probably the lowest number of applications in the last 10 to 15 years," said Rohit Kapuria, counsel at Saul Ewing. "But there's been a resurgence of confidence in the market. People are coming out of this slumber, and we have noticed … more activity. The increase in activity is also tied optimism on immigration."

--Editing by Orlando Lorenzo.

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