Ask Robert Ray how the Nevada securities industry is doing from a commercial real estate perspective amid the coronavirus pandemic, and you’ll get a mixed response.
In the securities industry for 25 years, and Senior Vice President, Director of Fidelity National Securities Group in Las Vegas, Ray is eager to see how the industry recovers as businesses begin to reopen and employees begin to return to their offices.
“Residential operations are doing much better than commercial operations,” said Ray. “The industry is more robust due to refinancing activity and the low [interest] rates. There is also a good dynamic on the resale side.
Moving on to commercial real estate, Ray said, investors, in general, are on the sidelines in determining the next step. “It has a direct impact on the title industry,” he said.
Commercial real estate sales are not completely at a standstill amid increasing job losses attributed to the coronavirus outbreak, but the normally busy spring selling period has slowed and more deals have failed for the time being.
Ray said that for commercial real estate, the outbreak was a “nasty onscreen blip.” He described the first quarter of the year as “our best quarter in probably a decade”.
“We have seen a fairly significant increase in [deal] cancellations, ”Ray said. “We are also seeing a lot of due diligence extensions, with some buyers asking for 60 to 90 days of due diligence before closing a deal.”
Despite the postponement of sales and short-term projects, projects continue to be built in southern Nevada, with more than 800,000 square feet of office space, for example, in the commercial real estate pipeline. These deals are being built for companies looking for inventory after the coronavirus outbreak.
Most real estate analysts expect a strong commercial property backlog in the market.
The second quarter of 2020 was relatively calm for commercial real estate. Among the largest transactions were Brookfield Properties selling six industrial buildings totaling 425,700 square feet in the 3.3 million square foot Hughes Airport Center, about three miles south of McCarran International Airport. Western Devon sold an 83,125 square foot facility for $ 12.1 million to Clarion Partners, and BKM Capital Partners sold a 17,047 square foot building for $ 16 million to a private investor.
“Commercial sales are kind of at a standstill,” said Shosana Carro, an official at Old Republic Title. “We still have loans pending… but a lot of underwriting is a little more difficult to deal with in the situation we find ourselves in now.”
Overall, Carro said, commercial real estate has held its value.
Title insurance
Any discussion about title insurance requires understanding that it is insurance. It does not solve the problems, it guarantees the risks.
Title insurance was originally developed in the United States because of a loophole in land registry laws. It aims to protect the financial interests of an owner or lender in the property against losses due to defective title, lien or other problems.
The policy will defend against a lawsuit against the title because it is insured or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy, Carro said.
The first title insurance company, the Law Property Assurance and Trust Society, was established in Pennsylvania in 1853.
Title insurance for commercial real estate covers apartments, office buildings, commercial developments and industrial facilities. Which means the commercial real estate market is starting its post-coronavirus recovery, as is the demand for title insurance.
“I don’t believe the recovery will be a V or U curve,” Ray said. “The recovery will take a little longer in more diverse communities. “
There are two types of commercial title insurance policies: homeowner and loan. Title loan insurance policies are designed to protect the investment of the bank or other lender if there is a problem with the title at a later date. A homeowner’s title insurance policy protects the buyer or owner of the property in the event of title issues.
Since commercial real estate transactions typically involve millions of dollars, complex transactions, and complicated title histories, title insurance plays a vital role.
It not only protects against title defects, but also generally covers issues such as boundary errors, zoning conflicts, and environmental concerns.
1031 exchange transactions
One transaction that remains in demand in the commercial real estate securities industry involves 1,031 trades. A 1031 exchange is the exchange of one business investment for another.
Named after the section of the Internal Revenue Service (IRS) code, the transaction allows taxpayers to defer recognition of gains on certain property provided that “the real estate is exchanged only for real estate of the same nature that are held for productive purposes in a trade or business or for investment.
Although the taxpayer must adhere to a number of details to defer any gain, the overall structure of these transactions includes the following steps: taxpayers sell real estate the proceeds of which are placed directly into an escrow account held by a qualified intermediary; and the proceeds of the initial sale are used to purchase a replacement property of the same nature.
Taxpayers must identify the replacement property within 45 days of the initial sale and enter into the replacement property no later than 180 days after the initial sale.
Due to the coronavirus, the IRS has extended the deadlines for 1,031 exchanges. Ray said the deadline has been extended from 60 to 90 days.
“We always see these deals happening,” Ray said, adding that the extra time allows some deals to be made.
“The offers we’re seeing are for well-located properties, albeit at a much slower level,” added Ray. “We are also seeing loan modifications. “
Coronavirus recovery
Nevada’s economy has been hit hard since the coronavirus pandemic arrived in March, but Ray predicts commercial real estate sales may pick up a bit in July as some deals have been made.
The unemployment rate has skyrocketed in the state, and a vaccine is still months away. As Nevada continues to reduce its stay-at-home order and more businesses reopen, forecasters believe the recovery will be gradual.
Nevada, however, is not heading for another great recession.
“It’s going to take a while for Las Vegas to recover,” Ray said. “Things will accelerate in the third or fourth quarter. It is certainly a challenge in terms of transaction volume.
Ray pointed out that the Nevada real estate market is healthier this time around.
“It took us 5 to 6 years before we started to come out of the recession,” Ray said, adding that this time around there was less leverage and less speculative construction.
“We operate a much smarter industry than during the 2008 financial crisis,” added Ray.
Even as demand for industrial properties rebounds, the effects on retail and office space are expected to last longer as restaurants close, retailers file for bankruptcy and businesses that occupy offices rethink their workplace strategies .
“This will change, especially the demand for office space, and the way the retail business is (structured) as online orders such as the door dashboard and post mates have become a popular alternative during the outbreak. “Ray said,” We will become more (outgoing) when we get vaccinated.
As restaurants reopen with social distancing protocols, Ray said that at 25% or 50% of capacity, many restaurants can operate profitably. He didn’t expect these percentages to increase “until this fear is over.”
“There is no market like ours,” Ray said.
Carro agreed, saying the market would stabilize and recover within 12 to 18 months. She added that once Nevada fully opens up to business, “the investors will come back.”
“We are not in 2008,” Carro said. “We are still here. We are surviving.
