5 Ways Coronavirus Is Roiling The Real Estate Market

By Andrew McIntyre
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Law360 (March 6, 2020, 6:23 PM EST) -- The rapid spread of COVID-19 has rattled markets across the globe, and lawyers say the virus is also causing problems for hotels amid conference cancellations and is creating a host of problems when it comes to real estate transactions.

Lawyers say hotels are now having to look closely at so-called force majeure clauses as owners and conference organizers asses the question of liability amid cancellations, and many real estate deals have also been stalled as a result of the virus.

Experts also fear that COVID-19 could affect liquidity, which could cause further issues for real estate deals.

Here, Law360 looks at five ways COVID-19 is impacting real estate.

Force Majeure Clauses Are Taking Center Stage

As hotels and conference centers across are canceling events due to concerns about COVID-19, lawyers are carefully reviewing force majeure contract clauses to see what obligations certain parties have and to see if the virus can allow conference organizers to cancel such events without penalty.

Such clauses allow for parties to get out of certain obligations in the event of unforeseen or uncontrollable events, but just how the clauses are worded is critical.

"We are receiving calls from our clients every day concerning questions on cancellations of large audience events. As a starting point, it is necessary to go through the contract provisions on termination and force majeure clauses," said Michael Polentz, a partner at Manatt Phelps & Phillips LLP.

"From there we are receiving follow-up questions related to how the matter might progress if there are disagreements between parties [regarding] whether or not this is a force majeure situation ... A number of attorneys at our firm are researching how similar situations were handled with 9/11 to see if and how similar arguments can be made on both sides," Polentz added.

Jim Butler, a partner and chair of the global hospitality group at Jeffer Mangels Butler & Mitchell LLP, said the force majeure question is relevant both for hotels as well as for the groups that have booked contracts there.

Butler said that "force majeure is going to be a big legal issue on all kinds of real estate contracts" and added that it will affect operating businesses, which hotels are, more than nonoperating businesses.

"It will certainly be interesting to see how force majeure clauses play out in commercial contexts," said Marc Gurell, a partner at Seyfarth Shaw LLP. "All of this may make hand-washing seem like the least of our problems."

Current Deals Are Being Held Up

While hotels have their own set of force majeure issues to contend with, real estate sales are also being held up as the virus complicates closings, according to lawyers.

"I have a current issue with a property outside of Milan," said Keith Poliakoff, a partner at Saul Ewing Arnstein & Lehr LLP. "The attorney for the seller has left the city and has quarantined his family in the mountains. As a result, that deal has come to a sudden halt."

The virus is causing various delays on closings, and, in some cases, lawyers have had to make changes to documentation when key dates are missed.

Jeff Diener, a partner at DLA Piper, said he's seen several deals that have been impacted by the virus.

"One China deal [was] delayed, and I have made proposed changes to a loan agreement on a pending transaction," Diener said. "Also, we're seeing some buyers ask for more time to close."

While experts say more of the delays are happening abroad at the moment, U.S. deals could start to see more delays, particularly if U.S. companies across the board adopt a temporary working-from-home model, said Simon Adams, a partner at Nossaman LLP.

"It is possible that these actions could cause delays to transaction closings if individuals are unavailable for periods of time," Adams said. "Contracts may have to be revised to address delays."

Joel Rothstein, a shareholder and chair of the Asia real estate practice at Greenberg Traurig LLP, said he's seen several deals put on hold.

"Whether it's a hedge fund targeting an ... investment ... in China, a China-based investor working on the sale of an office building in the U.S., or a South Korean investor targeting a hotel asset in Japan, investors and other market participants are moving slowly as the impacts of COVID-19 unfold and people are practically constrained from traveling, meeting and assessing targeted assets," Rothstein said.

There May Be Buying Opportunities

While the spread of the virus is holding deals up, lawyers say COVID-19 may actually also create new buying opportunities giving falling demand and a stock market that has tanked over the past two weeks.

Hotel and retail properties in particular are receiving more attention on the buying front as owners are concerned about low vacancy and foot traffic, experts say.

"I had a discussion last week with one hotel operator whose properties in China and Hong Kong target upscale leisure and international business travelers. The operator noted that some properties were running with occupancy as low as 15%," Rothstein said. "Some strategic investors believe that if current market conditions and stresses continue for an extended period of time, opportunistic investment opportunities will emerge in certain hotel and retail properties in Asia."

But while the drop in travel is impacting prices, so too is the stock market plunge. Share prices in public REITs have tanked, and Adams said that may mean there are buying opportunities for assets owned by such REITs.

"We are hearing rumors — right now, only rumors — that several of the large institutional real estate investors have basically said pencils down to all of their staff," Butler said. "They believe that they should wait and see if there is an impact that creates a price opportunity."

And investment firms also still have large amounts of capital on the sidelines and may see the current environment as an opportunity to do deals, lawyers say.

"There is substantial dry powder ready to be deployed in Asia real estate," Rothstein said. "Investors and other market participants are continuously looking for attractive opportunities."

Construction Supply Is A Concern

Since so much of the supply chain for U.S. construction is tied in some way to the Chinese market, disruptions in supply there are likely to complicate construction projects in the United States.

"One other area where there will definitely be an impact is in development and construction," Polentz said. "Given how much of the construction materials come from China, there is certain to be delays in projects everywhere."

And those delays may soon start to creep up, since a disruption in material supply from China can take some time to be felt in the U.S.

Butler said that while China is "ramping back up," there's likely to be a 30- to 45-day delay in getting supplies for U.S. projects due to earlier disruptions in the supply chain.

"Labor and supply chain disruptions undoubtedly will also have an effect on U.S. builders," Gurell said.

And even when it comes to construction, force majeure may come up, with parties closely examining contracts to see what obligations and liabilities they have in the event of construction delays.

"How those delays play out remains to be seen but will certainly involve arguments over liquidated damages clauses and, again, force majeure clauses in the construction contracts," Polentz said.

Financing Is An Unknown

While access to materials is one issue, projects also need capital, and experts say COVID-19 could cause problems on that front as well.

On that point, again, hotels are a big focus, lawyers say.

"What I'm seeing most dramatically is the impact on hotel transactions," said Kristen Lonergan, a shareholder at Greenberg Traurig. "Some lenders have gone pencils down completely on all hotel deals, while others have terminated negotiations on term sheets and commitments. In the near term, hotel financing is going to be very challenging."

While lenders are skittish about hotels, the concern about a cutback in travel is causing lenders to exercise caution across the board when it comes to commercial real estate lending, according to lawyers.

One big concern, Butler said, is that "staycations" replace vacations, which he said could make lenders more anxious.

"If that happens, it could create a ripple effect," Butler said. "Lenders could become much more concerned ... and put their pencils down on underwriting deals. If that happens, we lose the liquidity of the system."

Lawyers say it's too soon to say whether or not COVID-19 will create a credit crunch akin to what happened a dozen years ago during the Great Recession, but say a pullback in lending is a real possibility.

"The big question is does the concern about the state of the economy and industry and health affect real estate financing?" Butler said. "Liquidity and financing are critical to transactions, to development, and to values in the industry. In a sense, it could be a chain of dominoes."

--Editing by Jay Jackson Jr.

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