Alex ConnIt is no doubt that retailing as an industry, and we as a nation, and indeed as one interconnected world, are facing a generational issue of great seriousness and magnitude. COVID-19 is changing our habits as individuals and as consumers, and while there are undeniable and significant problems that have been caused by this new environment, that does not mean that the retail industry is not already adapting to our new (but hopefully temporary) reality in order to meet the needs of consumers. Many segments, including but not limited to medical, grocery, and delivery are desperately hiring in order to keep up with demand.

In descending order of big flashy hiring numbers, Instacart is searching for 300,000 workers, as “the last few weeks have been the busiest in Instacart’s history” per CEO Apoorva Mehta. Walmart is looking to hire 150,000 people by the end of May. Amazon is seeking 100,000 new employees. Dollar General and Dollar Tree are planning to hire a combined 75,000 additional workers. CVS is hiring 50,000, while Walgreens is hiring 10,000. Kroger is also looking for about 10,000 new hires. Dominos is seeking an undetermined number, but is trying to hire 1,000 new workers in Chicago alone. Aldi, H-E-B, PepsiCo, Publix, Sprouts, and Stop & Shop are also actively looking for new hires. Uber is encouraging its drivers to explore the delivery options via UberEats and says that there has been a 10 times increase in restaurants signing up for delivery services. There are many others that are not listed, but a simple google search shows just how many positions are starting to open.

In addition to these named bigger companies, this shift is also impacting companies further down the supply chain. Lineage Logistics, which is the largest refrigerated warehousing company in the country, is hiring 2,000 additional workers. The 3M division responsible for the N95 respirator masks is hiring, as is GE Healthcare, as they plan to collectively pump out COVID-19 related equipment including CAT scanners, ultrasound devices, mobile X-ray systems, patient monitors, and ventilators.

While it seems obvious that many of these industries are the logical ones to shift and grow into these slightly new roles, it will be interesting to see how the rest of the retail world evolves as well. As one example, craft stores like Joann Fabrics are offering curbside pickups, giving families another option to stay busy at home. Restaurants are discovering and inventing new ways to get their menu options onto the plates of consumers without seating them in their dining rooms. While this is a horrible way to force changes in the retail industry, companies and the industry as a whole will see significant innovations from this situation, long after COVID-19 is hopefully a distant memory.

Until that time, wash your hands, keep practicing good social distancing, and stay home if possible. From myself and everyone else at Ulmer & Berne LLP, I hope you and your loved ones stay safe and healthy.

Steven LarsonIn Part One of this blog post, I discussed an article recently published by CRE – The Counselors of Real Estate entitled, “The Coronavirus, the End of the Cycle, and U.S. Commercial Property Markets: Early Thoughts.” In this Part Two, I will continue my discussion of the long-term issues facing the real estate sector as a result of the coronavirus.

Bricks-and-mortar retail has spent the past 10 years experiencing a seismic shift toward e-commerce, eliminating mainstay stores like Sears and Toys ‘R Us and forcing retailers to adapt to changing consumer shopping habits. Social distancing and stay-at-home orders have greatly increased our reliance on e-commerce. Consumers who have shunned e-commerce in the past have been forced to adapt and may continue to utilize its convenience once the pandemic passes (hello, mom and dad). It is, therefore, reasonable to assume that there will continue to be an increase in empty storefronts and closures of malls that were already struggling to keep tenants, particularly with vacancies left by restaurants that could not weather the storm. This e-commerce shift, however, will continue to benefit the industrial and logistics market, particularly last-mile logistics.

The biggest potential long-term shift may be in the office leasing market, as companies are forced to allow workers to work remotely. Companies are essentially test-running virtual workplaces for the next four to eight weeks, and some may decide to make that shift permanent for its employees and greatly reduce their physical footprint. There are a myriad of reasons to bring employees together in a workplace, but for jobs that can be performed remotely without much need for collaboration, employers may seek to minimize lease overhead. This shift would actually create a boon for those flex-space owners who are likely going to feel significant strain in the coming months.

For an interesting discussion on COVID-19’s impact on commercial real estate lending, please see this post by my colleague, Kristin Boose.

Ultimately, both the short-term and long-term effects on the real estate sector will depend on a number of factors that are nearly impossible to predict right now. Those factors include: the duration of this pandemic; whether we face a second pandemic in the fall and winter; what actions the federal and state governments take to ease the short-term crush on families and small businesses; and whether the financial markets can quickly get back to full speed. To quote the author of the article referenced above, “This is going to be ugly. And we won’t know for a while just how ugly or for how long.” Be mindful, however, of the wise words of Marcus Aurelius, “Never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present.”

Steven LarsonCRE – The Counselors of Real Estate recently published an article entitled “The Coronavirus, the End of the Cycle, and U.S. Commercial Property Markets: Early Thoughts.” The article provides excellent insight into the current headwinds that the economy and more particularly, the real estate industry, are facing from the perspective of an economist. Below is a summary of the article, with my own commentary added.

As the United States (and the world) hunker down for at least the next four to eight weeks of stay-in-place orders and rising COVID-19 infections, it is clear that the current pandemic will create at least a short-term recession across the globe. Economists and analysts have been saying for the past two years that our growth engine was nearing the end of its cycle, but no one predicted this would be how it goes down. The most important questions, from an economic and a real estate perspective are: How long will our lives be upended? When can restaurants, stores, hotels, and small businesses get back to normal? How will landlords, tenants, borrowers, and lenders mitigate losses and work together to avoid widespread eviction, foreclosure, and bankruptcy? Will the Fed’s actions give banks the confidence and the credit needed to lend? And ultimately, what structural changes await us at the other end of this pandemic?

From an economic perspective, mass layoffs in many industries combined with sinking consumer and business confidence will have a significant effect on spending in the next couple of quarters. As of this writing, Congress just passed and the President has signed a $2 trillion stimulus package (the CARES Act) that may help to reduce the economic impact on small business, as it contains an aggressive forgivable loan program that is designed to help small businesses meet their financial obligations and keep their employees on the payroll over the next few months. For more information about the CARES Act, click here.  In the meantime, many Americans are trying to figure out how to survive the next few weeks or possibly months with reduced or eliminated income. Unseen are the effects that stay-in-place orders will have on the supply chain-side of the equation. However, in some states, the number of “essential businesses” are far greater than you would imagine (at least Ohio thinks lawyers are essential!).

Short Term Issues

From a real estate perspective, there are both near-term and long-term consequences of this pandemic. As April 1 approaches and rent becomes due, thousands of landlords and tenants have been vigorously reading their leases and analyzing their options. Clauses often overlooked, like force majeure, take on a new importance as many tenants have been forced to shut down and may be unable to meet their rent obligations. As tenants fail to make rent payments, come May 1 landlords may struggle to meet their debt service obligations or worse, fail to meet their debt service obligations AND fail to satisfy their financial covenants. Landlords who have tenants who were forced to close will need to work closely with their lenders to get in front of any potential defaults.

Business interruption insurance initially provides a glimmer of hope to many businesses, but many insurance policies specifically exclude outbreaks and pandemics – it is of course important to review your own insurance policies regarding any potential recovery. In the short term, it will take the cooperation of tenants, landlords, and lenders to find temporary solutions, or the courts (once they open again) will be jammed for years working through all of the eviction, foreclosure, and bankruptcy suits. Worse, though, would be the empty store fronts and thousands of failed businesses that could not navigate these unchartered waters if all parties involved are not able to work together.

In the real estate sector, the most vulnerable in the near-term are assets with travel-related uses, such as hotels and flex-office space owners. Business travel is limited to only the most essential and vacation travel has ceased almost entirely. And, although not a significant industry in Northeast Ohio, for flex-space owners, tenants sign extremely short-term leases and the easiest overhead for those tenants to chop will be rent.

Apartments may experience a drop in demand as tenants lose income or jobs and are forced to move back in with mom and dad. As apartment leases expire, tenants may seek cheaper options like finding additional roommates or moving away from the downtown core of higher rents and smaller spaces.

Retail owners and tenants will suffer a lot of pain in the coming months until consumers feel confident (and have permission) to leave their homes and start spending again, assuming they have the money to do so. Slim margin businesses like restaurants may not be able to weather the storm and will lead to an increase in bankruptcy filings.

The office and industrial sectors are less likely to see short-term impacts, but nonetheless may see rising vacancies as companies downsize. Niche markets, such as student housing, are also seeing an immediate strain as students are forced to move home and may cease paying rent. Owners of senior living facilities may face serious financial strain if COVID-19 makes its way into one or more of their facilities.

Brad KaplanAs of Monday, March 23, 2020, Illinois, Ohio, and Kentucky have issued executive orders for the purpose of limiting person-to-person contact to avoid the transmission of the COVID-19 virus. This article summarizes how each of these three states are defining “essential businesses” and “essential services.”

Illinois

Governor J.B. Pritzker issued Executive Order 2020-10 on March 20, 2020. Section 9 of the order includes in the definition of “Essential Infrastructure” in part the following activities that apply to real estate and construction: construction of food production/distribution facilities; health care facilities; public works facilities; building management; building maintenance; construction and repair of highways, railroads, and other means of transportation; waste and recycling removal; and telecommunications facilities and infrastructure. The order specifically states that it should be interpreted as broadly as possible.

Other important sections of the order include:

  • Section 12(a) permits stores that sell food and pharmaceuticals to remain open.
  • Section 12(e) permits gas stations, auto supply and repair, and bicycle shops to remain open.
  • Section 12(f) permits all financial institutions and title companies to remain open.
  • Section 12(g) permits hardware stores to remain open.
  • Section 12(h) permits the following “critical trades” to continue working: electricians, plumbers, cleaning and janitorial services, HVAC installers and repair, painting, and moving/relocation service providers.
  • Section 12(n) permits businesses that supply essential businesses may remain open.
  • Section 12(r) permits professional services providers (lawyers, accountants, insurance brokers/agents) and real estate services to remain open.
  • Section 12(v) permits hotels and motels to remain open, but food can only be sold for delivery or carry out.

Click here for the full text of the order.

Ohio

Governor Michael DeWine and the Ohio Department of Health issued a “Stay at Home” order on March 22, 2020, that became effective on March 23, 2020, at 11:59 p.m. In Ohio, all businesses are required to close to the public with the exception of “Essential Businesses & Operations.” Section 9 of the Ohio order permits the same activities as Section 9 of the Illinois order.

Other important sections of the order include:

  • Section 12(j) permits hardware stores to remain open.
  • Section 12(q) permits building materials, hardware, paint and other construction material distributors and sellers to remain open.

Kentucky

Governor Andy Beshear issued Executive Order number 2020-246 on March 22, 2020, that became effective on March 23, 2020, at 8 p.m. The Kentucky order mostly focuses on businesses that are life sustaining (food, pharmaceuticals). The Kentucky order permits distributors and sellers of building materials, equipment, and supplies to remain open. The Kentucky order is silent as to construction, manufacturing, distribution, and transportation industries.

A comprehensive federal order or directive would be useful now so that there is commercial consistency from state to state. Until such a federal order is issued, you should check each state’s website for updates on what is considered a permitted activity and what is not.

Ulmer’s Real Estate Practice Group is closely monitoring developments related to the COVID-19 pandemic and is available to provide strategic counseling and advice as this crisis continues to unfold. Please reach out to our attorneys if you have any questions.

Kristin W. BooseOn March 20, 2020, the CRE Finance Council hosted a great conference call entitled, “The Impact of COVID-19 on the Commercial and Multifamily Real Estate Property & Finance Markets.” Like many of us in the commercial real estate world, I’m anxious to get my arms around what impact, both short and long term, the COVID-19 pandemic will have on our real estate markets, including real estate finance, a focus of my practice. Spoiler alert – we don’t truly know. These experts provided us with their thoughts and observations, discussing both the lending and debt markets, including macroeconomic and microeconomic aspects. Here are important takeaways I learned concerning COVID-19’s impact on lending and the various real estate sectors:

  • Commercial real estate loans substantially on their way to closing are likely to get done, unless of course the property or portfolio of properties that is the subject to finance is in an especially hard-hit area (e.g., hospitality) or the closing of the loan becomes administratively difficult (e.g., closing of recording offices). The speakers representing the bank lending side of the call indicated that they’d continue to scout lending opportunities, however, it seemed clear to me there’s a good chance pencils are down or are being slowed on new borrowings until the smoke clears on the COVID-19 crisis.
  • April 1 will be the lending market’s first true dose of reality. Why? Because monthly loan payments are often due by borrowers on the first of the month or soon thereafter, and this will be the first payment date since COVID-19 really gripped our nation and economy. Part and parcel of those debt payments is whether tenants for tenanted properties (think multifamily, office, retail) can make, delay, or withhold their monthly rental payments. Rental payments are the life blood of these asset classes.
  • The speakers then discussed the issues and challenges faced by certain real estate asset classes:
  • All assets classes face the same central and crucial question: What is a property’s “true value”? Commercial real estate lenders lend on property value and property income. If these central tenants of lending can’t be realistically determined, quality lending decisions can’t be made. A main concern is just how long, wide, and deep COVID-19 will reach. Are we talking weeks or months or longer? Will a property’s value change as a result of COVID-19, and if so, just how far will that value fall? Where is bottom?
  • All tenanted properties: The big question is how rental streams will be impacted, now and over time, depending on the length of the crisis and ability for the applicable sector to “bounce back.” Will tenants continue to pay rent, or will that rent stream be interrupted in some manner (abated, delayed, or stopped altogether)? On the multifamily side, people are likely staying put. People may be dealing with a situation where their lease has ended but is held-over due to some aspect of the COVID-19 situation (thereby decreasing turnover and/or new rentals) or situations where a landlord is restricted on or delays evicting a nonpaying tenant.
  • Properties under construction: Properties under construction or renovation are facing work stoppages by their contractors and subs as well as supply chain shortages. In addition, I also have concern over the people and resources it takes to create and execute on all the various layers of completing construction loan draws. These present a whole host of issues to consider, including delay of construction, delayed payments, and delayed time to market.
  • Industrial: Supply chain disruptions are causing tremendous issues for industrial sites, in addition to decreased workforces on sites.
  • Office: I thought the speaker’s comments on the office property sector were interesting, which were – in so many words – what if this remote work gig works too well and employers actually find benefits to having a home workforce, in part or in whole? How would this impact the office market? This made me think about a conversation between my husband and our neighbor, both physicians. (No worries, the conversation was from across the street so social distance was respected!) They were comparing notes about how COVID-19 has caused their practices – almost overnight – to switch to telemedicine and “virtual visits.” Very few patients were walking in their doors this past week. They both feel this COVID-19 outbreak will dramatically shift the practice of medicine, making telemedicine and “virtual visits” more in the norm. If true, think about how this may impact need for medical office space.
  • Student Housing: Similar to the remote work aspect of the office sector, a similar comment was made about the student housing sector. We’ve seen colleges and universities across the nation switch to online, offsite classes. Assuming this works well, could there be less need for student housing in the future?
  • Hotel/Hospitality and Retail: These sectors are the most worrisome. We are now seeing and hearing in our daily news headlines that malls and retail stores are closing and travel is being discouraged and even restricted. The experts feel lending will halt entirely for these areas with exceptions for special situations.

Not surprisingly, banks and servicers are anticipating a rise in real estate assets going into special servicing (aka “workout”) in the future. I suppose the question is: will it be a wave or a tidal wave? Despite the gloom and doom feeling of late, there was good news. That good news is: the lessons of and the institutional changes resulting from the “Great Recession” (December 2008-June 2009) vastly improved our nation’s financial infrastructure. We are on solid (or at least much better) footing to weather this COVID-19 crisis. In addition, despite it being 10 years ago, the “Great Recession” is still a recent memory for many of us, and importantly, our financial industry leaders. As result, I am hopeful we have cool hands at the economic controls as we travel through these turbulent times.

The parting words on the call were an acknowledgment to meet back in a few weeks to reassess. At that time, we’ll have a better idea on the timeline and reach of the virus’ impact on our nation. We will know better how well we’ve prepared (and washed our hands, not touched our face, and kept our social distance, etc.). Until then, keep safe and wash those hands!

I attended the recent ICSC Regional Law Conference in Columbus, Ohio. It was a great conference where I reconnected with many great colleagues – including my son Kendall who is only in his second year practicing law, but recently took advantage of his Dad in a lease negotiation where he represented an escape room tenant and his Dad represented the landlord.

Richard Tranter’s presentation on the need for retail to be experiential was great. But Kendall explained it best when he said “a successful retail experience is one where people want to post an Instagram picture about the experience.” I am definitely stealing that.

The best presentation was actually about cannabis, which is a fast-growing retail industry with very interesting legal issues. As you can imagine, attendance for this presentation was high. (ha!) Continue Reading Fix Your Lease Even if You Can’t Fix the Weather

University of Cincinnati Law Professor Sean Mangan does not hate many things, but ‘and/or’ has to be first on the list – along with whomever might be playing his Irish that weekend. I had the pleasure of taking multiple drafting classes with him several years ago, but I honestly never quite understood the depth of his anger towards the use of ‘and/or’ (along with “thereof”, “henceforth”, “hereto”, and the like). However, as it turns out, he is in very good company, as many judges and legal drafters seem to have some unresolved anger issues with this phrase as well.

The generally agreed upon meaning of “X and/or Y” is “X or Y or both”. That is a fine definition, but the problem is that the lack of clarity on the surface of the expression can allow opposing counsel to deliberately misinterpret whatever provision is in question in their client’s favor. If “X or Y or both” is what you mean, then just write what you mean! Take a look at how judges and style guides view the use of ‘and/or’: Continue Reading A Plea And/Or Request: Stop Using And/Or

I just attended the BDO Restaurant CFO Roundtable where I presented the Top 10 Most Important Legal Provisions of a Restaurant Lease. Arranged by Dustin Minton and Floyd Roades of BDO, the Roundtable brings together restaurant industry executives to learn about industry trends. BDO is the industry leader when it comes to accounting services for restaurants. I was very impressed with every BDO person I met and I loved their new office. Wide open spaces designed to encourage collaboration. The best space was the employee dining room which had a ping pong table in it and an attached balcony overlooking Great American Ballpark.

I won’t recreate the whole presentation here, but I will say that the top most important lease provision (according to me) is the construction exhibit/clause. Between chargebacks, bonding requirements, security deposits, impact fees, requirements to work before permits are received, equipment requirements and design requirements, a tenant’s construction budget and opening schedule could be significantly affected. And these things are never covered in the LOI and typically are not even presented until the end of the lease process. Continue Reading Life is Like a Restaurant

Relationships matter.

Seems obvious, but not always understood. However, this past week Scott Kadish, Alex Conn and I experienced firsthand the importance of this simple principle.

Last week we attended the ICSC U.S. Shopping Center Law Conference in San Antonio, Texas. For 4 days we attended educational sessions (we actually led the discussion in 2 of those), visited with clients and colleagues, renewed friendships and made new ones. There were about 1,350 attendees at this conference, the programming was terrific, and opportunities were abundant.

Clients and lawyers with whom we may only have an electronic connection for most of the year were suddenly and delightfully in the same physical place as us for 4 or 5 days. It was during this face-to-face time that I realized how important it is to actually know our clients and the folks who sit across the table from me the rest of the year. Continue Reading Relationships Matter

“Street Food” has generally referred to prepared food items ready for immediate consumption sold on the street or in a public space from a food cart, food truck or similar moveable station. The connotation was cheaper fast food.

Today, “street food” is a unique, trendy selling point. There is Piada Italian Street Food that brands its entire restaurant chain this way. It’s the same with Tortilla Mexican Street Food in Columbus, Ohio. At Blue Agave in Springdale, Ohio, a local Mexican Restaurant that I frequent, they have Street Tacos on the menu. Quan Hapa in Over-the-Rhine in Cincinnati advertises itself as Asian Street Food. The whole notion of street food has changed to a more favorable connotation. It is nostalgic, bringing together the idea of unique, freshly-cooked food served in a social setting.

Fast food too has evolved with the idea of “fast casual”. This is a whole new category between fast food and casual dining. It seems “fast food” still has a poor connotation for quality, making it appear that the move toward “street food” or “fast casual” may just be a way to avoid being labelled “fast food”. Whatever the ‘label’, I have to say I love Piada, Tortillas, Blue Agave, Quan Hapa, and eating at food trucks. But I also love The Waffle House, so maybe you have to consider the source.