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The CEO of real estate heavy-hitter Eastdil says dealmaking has dropped 'precipitously,' and warns things won't improve until debt markets thaw

Roy March, Eastdil Secured CEO

  • Eastdil Secured CEO Roy March spoke during a Goldman Sachs webinar about the significant drop in real-estate transactions during the coronavirus lockdown. 
  • March made a distinction between 'have to' and 'like to' transactions. The first is continuing as the sellers are looking for crucial liquidity, even though they're selling assets at reduced prices
  • 'Have to' transactions took place in the debt markets at the beginning of the crisis, but have now shifted to real estate and hospitality. 
  • 'Like to' transactions have paused, as sellers don't want to sell assets for reduced prices during this time of distress. 
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The last remaining deals before the coronavirus lockdown have either closed, been put on hold or dropped off, according to the CEO of one of commercial real estate's most successful brokerages.

Eastdil Secured CEO Roy March said during a Goldman Sachs webinar in April that real-estate transaction volumes have dropped off "precipitously."

The only transactions that are continuing? Transactions of necessity. 

"What we've seen is this wave, if you will, of 'have to' versus 'like to' transactors," March said.

At their core, the "have to" transactors are those whose financial health has been so heavily impacted by the coronavirus crisis that they need to transact in order to remain solvent or have enough cash to continue operations. The "like to" transactors are able to go slower. 

Unsurprisingly, the "have to" transactions are fetching much lower price tags, as purchasers smell blood in the water. They're taking on the distressed assets, so they figure they should pay less, and therefore make more. 

The first wave of "have to" transactions happened in the mortgage REITs in March, before the Fed's stimulus propped up the economy. At the worst points, mortgage REITs faced margin calls, forcing them to find liquidity to pay the calls. 

Since that first wave and the Fed's stimulus, transactions in the debt markets have "shut down absolutely and completely." March said in the near-term, there are signals that markets will begin to turn on again, which is a necessary part of a functioning real estate market. 

"We need a healthy debt market ultimately to come back to some sort of new normal," March said. 

The other "have to" transactions are taking place in the two sectors who have seen business almost completely halt during the coronavirus lockdown: retail and hospitality

In retail, rent payment has crawled to a halt, with March citing rent payment from only 5% to 15% of tenants. 

"We're over-retailed as a country," March said. "This has taken what was probably a five-year trend in terms of de-retailing ... and accelerated it into a matter of months." 

Hospitality is arguably even worse off, as rents (room rates) reset every night. March said that hotels need to make $1,000 to $1,500 a month per room in order to pay for their cash burn. Transactions in that space are driven by "groups that ultimately have to figure out, in essence, to come up with the working capital."

The "like to" transactions have largely halted, as those firms want to avoid taking hits on the value of their assets by transacting in a period of distress. 

"They're waiting for the fog to lift to ultimately transact," March said.

These "like to" sectors are in the industrial, office, high-end multifamily, and life science spaces.

Read more: 7 charts show how the coronavirus could clobber real estate, from retail vacancies of nearly 15% to plunging office rents in Texas cities

High-end multifamily hasn't seen the drop off in rent payment that workforce housing has, according to March. Office space sees a similar demarcation, as high-end locations see high 90% rent payment, while locations with smaller or less prestigious tenants see rent payment percentages as low as 60%.

On the industrial side, demand is actually increasing as e-commerce and grocery stores are both having record levels of demand.

Life science, which is still in its infancy as an asset class, is seeing near 100% rent payment levels. 

"It's not a fad, it's a trend," March said. 

At the end of this, there will be transaction opportunities for any firm that's holding the capital to do it. Right now, they're just preparing to make those acquisitions. 

"People like us are hanging around the hoop and staying relevant," Ralph Rosenberg, global head of KKR real estate, said earlier on the call. 

SEE ALSO: 'We should be prepared for a new normal': 3 real estate experts on how the coronavirus is transforming offices and accelerating the rise of industrial property

SEE ALSO: Real-estate tycoon Aby Rosen is abandoning $600 million worth of acquisitions as the coronavirus puts New York City's multibillion-dollar sales market on ice

SEE ALSO: Major tenants are delaying big leases in NYC as they re-think their office space needs for the post-coronavirus world

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