Market Insights: San Diego – May 2020

On Tuesday, May 5th, RJ Rotman, strategic account director at Juniper Square, spoke with three of our San Diego-based customers about what they see happening in that market: Danny Gabriel, CEO at ColRich, Doug Arthur, President and CEO at Sentre, and Kurt Kaufman, COO at Brixton Capital.

The multifamily sector remains healthy, but the retail sector is struggling

While it’s unclear exactly what a “new normal” will look like for real estate investment, some short-term trends are beginning to provide clarity. Multifamily assets remain relatively healthy, save for a small portion of late payments and payment plan structures, while retail assets are struggling and partners are pushing for more financial leniency.

Doug Arthur, CEO of Sentre, a vertically integrated investment firm, said revenue projections – rent collection, in most cases – are completely dependent on the sector and the market. In April, Sentre’s multifamily portfolio collected about 97.5% of contractual revenue, 95% of office revenue and 77% of retail revenue. He expected those numbers to slip “pretty dramatically” in May.

“Malls across the nation have a high exposure to nationals. Some [national] tenants are simply choosing to withhold rent; they are now posturing on how they want to start paying rent,” said Kurt Kaufman, COO of Brixton Capital, a private real estate firm invested in retail, office and multifamily. “Our mall portfolio saw collections in the 40% to 20% range, depending on the location and tenant mix of the asset.”

Communication – with both tenants and investors – is key

The importance of a tightly run operation by an experienced management company has been critical to success in multifamily, the group agreed.

“There’s no playbook to a pandemic, particularly with tenants,” said Danny Gabriel, CEO of ColRich, which invests, develops and owns primarily residential properties. “I think how difficult it is to operate is lost on a lot of people.”

Gabriel said in lieu of sending letters to tenants regarding rent, he suggests management teams reach out to tenants directly, which helps build a long-term connection.

“Call each individual tenant, figure out their situation, try to empathize with what they’re going through,” he said.

On the flip side, Arthur cautioned owners to look out for retail tenants that have plenty of liquidity and are simply speculating as to how business could be damaged in the future.

“We’ve divided people in two camps: those who can pay us rent and we know they can, and those who really probably need our support,” he said. “We’re literally going tenant by tenant. We’ve just told our managers to stay positive, to understand people are going through a lot – that they’re going to hear a lot, so don’t take it too personally, and we’ll work through this.”

Communicating with investors is equally important, panelists agreed.

“We’ve been very proactive in our communications, explaining things are going to be bumpy, but that we were built for this,” Arthur said. “We went with full transparency, and the feedback has been tremendous.”

The wellbeing of employees and tenants must be a priority

The group was aligned on their first priorities being the health and safety of employees and tenants, and that includes the traumatic effects COVID-19 has had on mental health.

Gabriel of ColRich said now is not the time to think of mental health as an issue of weakness.

“The mental health aspect of COVID is being ignored too often,” he said. “The challenges of telecommuting and not being in the office to see your colleagues, or just being at home and not seeing people are widespread. We are working as hard as we can to create a sense of community and connection and keep people motivated.”

The transactions market hasn’t opened yet, and investors remain cautious

Particularly on the retail side, investors will be “hyper cautious” about purchasing, looking to avoid buying into any problems sellers have absorbed with tenants, suggested Kaufman of Brixton Capital.

“I think we’re going to all review the tenant files in extra detail. But at the same time, there may be opportunities for very desirable locations to open up. Prime real estate that was probably locked up for many years might become available with some impacts to those tenants,” he said.

Gabriel said ColRich has traditionally been a contrarian investor, but the reality is that it’s tough to value multifamily assets in the current market.

“If you’re going to go buy something, it’s just a basis play. You don’t really know what your [Net Operating Income] is. It’s just a guessing game. You probably can’t even go visit it the way you were going to visit,” he said. “Right now things are pretty much on hold.”

How we do business will change, and agile companies will come out stronger

Arthur cautioned that as people start to go back to work and the economy opens back up things are going to look a lot different than they did in the past.

“Are people going to be wearing masks? What are the precautions that we take in the office? How many people can actually sit in a conference room? How far apart are you sitting next to your colleague? Are you doing shifts?” he asked. “I think that’s going to be a second shock to most people.

“But on the positive side, we’ve recognized where we were probably too instinctually driven and we didn’t have data that was readily available, not across the platform but in certain areas,” Arthur continued. “Instead of shying away from it, we’re leaning into it, and we’re investing heavily in technologies that are actually going to help us better track and make better decisions.”

“This situation is definitely going to accelerate some change,” Kaufman added. “It’s going to cause our firms to innovate, and that’s very exciting. I already see how these daily video check-ins are leading to different thoughts and processes on how to improve as a firm. So being thoughtful of how the next week, the next month, the next six months, six years look is very exciting.”

Click here to watch the full conversation