Greetings from Los Angeles, and welcome to this year's edition of Real Estate Rewind. 2019 is in the books!
Each year, we use this time to reflect on the trends and market developments we saw over the last 12 months. Our hope is that we will be better informed to serve your needs.
This year's Real Estate Rewind includes contributions from my colleagues, Jessica Fluehr (San Francisco), Skyler Anderson (San Diego), Barbara Trachtenberg and John Sullivan (both Boston).
In a word, we would describe 2019 as choppy. We were frequently reminded of the adage "a smooth sea never made a skillful sailor." The lessons learned from 2019 will be beneficial to you in 2020.
Here is how the Los Angeles team spent its time in 2019:
Number of Transactions
Purchase and sales
Big lease / lease workouts
Mortgage loans (acquisition loans and refinancings)
Mezzanine loans and preferred equity
Construction and improvement loans
Loan workouts and modifications
Joint ventures and recapitalizations
REIT and DST formations and offerings
The notional amount of the transactions for our LA-based team in 2019 was approximately US$4 billion. The map at the end of this report shows the locations of many of the properties we worked on over the last few years - far beyond the borders of California.
The primary market trends observed in 2019 are summarized below. In addition, we have included the annual analysis of transaction vitals - key metrics in purchase and sale and CRE finance (ie, "what is market"). These charts have been useful to many of you, allowing you to gauge your deal terms against the charts. The vitals are followed by a reader favorite - "Servicer shenanigans, origination commiseration and transactional twists." We conclude with thoughts about the future of contracts and the impact of new technologies on the way we do business.
So, here we go, fast-forward to the rewind...
Purchase and sale observations for 2019
In the purchase and sale arena, although we closed nearly 20 deals, we had 10 or so failed deals. As noted, it was choppy. Four general observations are set forth below followed by the PSA vitals for 2019.
Smart(er) money: Like Warren Buffet sitting on US$130 billion and (wisely)(?) refusing to chase deals, clients were less inclined to engage in bidding frenzies. Price was the culprit in many of the failed deals. Greater emphasis was placed on conventional due diligence. Buyers were careful and in some cases looked for reasons to cancel. Brokers are also telling us that the number of buyers bidding on properties is significantly less. Off-market: Relative to prior years, more of our transactions occurred "off-market" in 2019. Sellers seemed more willing to engage in exclusive dealings with one or two buyers. One would have expected that to mean compressed timelines to get deals done with fewer contingencies - but that was not the case. Again, even in a non-competitive situation, buyers were careful. Conditions precedent: In 2018, we observed the increasing use by buyers of conditions precedent tied to property performance or key tenants. That continued in 2019. In three of our transactions, occupancy thresholds in the multifamily context were imposed as conditions precedent. In other transactions, conditions related to ongoing tenancies by key tenants in the office and retail contexts were imposed. Fact-specific conditions were prevalent, particularly in industrial, self-storage and single tenant deals. Environmental risk: Notwithstanding the above, buyers have become more willing to accept known and unknown environmental risks. Environmental conditions are viewed by some buyers as potential profit centers. Also, historically, the purchase of environmental insurance was not the norm. Now, even in certain instances where the phase I ESA is clean, buyers are purchasing coverage or adding properties to their blanket policies. Premiums have come down and buyers are generally more informed about the utility of the product. Purchase and sale vitals for 2019
Market Observation / Comparison to Prior Years
Due diligence periods
Flat to lengthening - 30 to 60 days
*Our East Coast colleagues advise that the norm in New York, Boston and Washington, DC remains at 30 days.
Access agreements are more common, such that one should not necessarily expect the longer due diligence period to occur while under contract (it may include time pre-PSA).
Rights to extend DDP
Not hard-wired in the contract, but frequently given upon request when more time is needed/desired.
Where available, always coupled with a non-refundable deposit (credit to purchase price)
Flat to Lengthening - 30 to 45 days after DDP (very rarely the shorter periods, eg, 10 days, we saw in prior years except in highly cooperative deals).
As to new debt, still rare. But, loan assumptions were more common. Loan assumptions typically involve an amendment to the loan and replacement of guarantors. This presents greater risk to sellers (as the condition may not be satisfied), but sellers were willing to entertain these conditions (reluctantly).
Certain sellers who have institutional access to capital are strategically obtaining financing (at currently low rates and favorable terms) within 3-6 months of going to market to sell the asset. For properties encumbered by CMBS debt, borrowers are seeking to ensure that lockout periods on loan assumptions, which in the past have been 1 to 2 years post origination, are limited to short windows before and after securitization (60 days on either side).
SNDAs as conditions to closing
Yes, about the same as prior years. Continues to be a thorn for sellers - who perceive it as a disguised financing contingency.
Particularly important in single or major tenant properties. Less important in multi/minor-tenant properties.
Right of buyer to extend closing date
Yes, but greater resistance to the concept in 2019.
*Still in high use on the East Coast
The extension periods are limited (typically not more than 30 days), and sometimes require a fee or additional deposit.
Reps and warranties
Static to shrinking list.
We also have seen a few clients entertain rep and warranty insurance (which has traditionally been limited to corporate deals, but is now gaining traction in the real estate industry). Similar to environmental insurance, as this trend continues, expect...