Analysis

NJ Real Estate Deals In Chokehold Amid COVID-19 Lockdown

By Jeannie O'Sullivan
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Law360 (March 27, 2020, 11:01 AM EDT) -- COVID-19 shutdowns and delays are derailing lucrative deals in what was New Jersey’s promising real estate sphere before containment efforts shifted into high gear amid the rising death toll.

Municipal office closures are halting the permitting and approvals process, social distancing is putting inspections on hold, and lenders leery of market volatility are yanking the plug on financing. Garden State transactional attorneys fear their clients’ projects may also become casualties of the coronavirus and that they’re heading into a major work slowdown once the dust begins to settle on the current frenzy of activity.

Pashman Stein Walder Hayden PC partner Scott R. Lippert was about to close on a restaurant lease for a landlord client when the prospective tenant just “disappeared,” he said, likely frightened off by the government-mandated social distancing that has all but crippled the dining industry in a matter of weeks.

Commercial real estate practice groups are now doing “triage” with respect to their clients’ matters, said Lippert, who chairs the firm’s real estate practice from its Hackensack, New Jersey, office. Right now, things are busy, as businesses rush to finalize what they can with a collaborative spirit, he said.

“It’s created a sense of urgency to close deals right now and not waste time squabbling,” Lippert told Law360.

But he and his colleagues are anxious about how the crisis will impact the Garden State real estate industry as a whole, and subsequently their practices.

Reflecting on his 40-year career, Lippert said the coronavirus could pack the economy with a harsher wallop than the stock market crash of 1987 and the Great Recession of 2008.

It was a different world in early March, when real estate professionals and attorneys were embracing the industry’s rebound since the subprime mortgage crisis sent the economy plummeting 12 years ago. The 2020 U.S. Outlook published by commercial real estate giant CBRE Group Inc. had predicted a “very good year” marked by “resilient economic activity” and low interest rates, among other positive harbingers.

The real estate success mantra “location, location, location” was always a cinch for the Garden State, a bustling, coastal commercial hub connecting major metropolises. Warehouse space has been a particular driver of the activity in recent times, attorneys said.

“You have a very hot industrial market because of the combination of the density, the Port of New York and New Jersey and, particularly, last-mile space,” said Greenbaum Rowe Smith & Davis LLP partner Jack Fersko, co-chair of the firm’s real estate practice group in Roseland, New Jersey. Last-mile space refers to the proximity between goods and their final destinations.

But COVID-19-related uncertainty is cooling things off with respect to deals, according to Fersko. The big question on clients’ minds is: “Do you go forward and do you not go forward?” he said.

As for the daily operations of real estate law, government office closures have set back many deals pending permits, title work and public input, attorneys said.

The cancellation of town planning and zoning board meetings has put attorneys like Scarinci Hollenbeck LLC’s Donald M. Pepe, who counts land-use matters as half his business, in a bind.

Those presentation-heavy meetings lead to approvals at the heart of time-sensitive contingencies in contracts. In one of his matters, Pepe said, he had to file an emergency court application in hopes a judge will decide that his client can unilaterally extend a contract time limit if the other party won’t.

“It’s going to do damage to timelines across the board,” said Pepe, of the firm’s Red Bank, New Jersey office.

Other pending deals require on-site surveys and inspections for environmental or occupancy approvals, but social distancing mandates have rendered those tasks “up in the air,” noted Fersko.

Lippert predicts construction could “grind to a halt” for work that’s deemed nonessential. A construction slowdown will throw a monkey wrench into countless projects, including planned transit-oriented developments that appeal to millennials seeking convenient travel from trendy places like Jersey City and Hackensack to New York.

Project financing is also on shaky ground, given economists’ predictions that the pandemic could send the nation hurtling toward a recession. One hesitant bank has put on the back burner a deal that McCarter & English LLP partner Martin F. Dowd is handling, he said.

“The projects that are teed up at this time might just not happen,” Dowd said.

A member of the Newark-based firm’s real estate practice, Dowd is adjusting to the “new normal” of his practice. One of his landlord clients recently asked him to draft a letter advising tenants about coronavirus protocols.

“Have I ever done that before in 30 years? No,” Dowd said.

Looking ahead, the collateral damage from the coronavirus could have far-reaching consequences for the office and retail sectors of commercial real estate, according to Lippert.

The pandemic has forced many employees to work from home, and employers who find that system to be effective might think twice about how much office space they really need, Lippert said.

As for brick-and-mortar shopping, a pastime that’s been on the decline since the advent of online commerce, the coronavirus could be the death knell, according to Lippert.

For many legal practices, the coronavirus crisis is undoubtedly sowing the seeds for plenty of litigation work, with experts predicting that business closures alone are bound to trigger a storm of challenges. The tidal wave of lawsuits coming will undoubtedly include many real estate fights.

That swing toward litigation means the transactional-focused real estate attorneys who are fielding a frenzy of frantic calls right now might have to prepare for barren fields in the coming months.

“[The pandemic] will generate work, but most will not be transactional,” Dowd said.

--Editing by Rebecca Flanagan.

For a reprint of this article, please contact reprints@law360.com.

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