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 Nowhere will this be more important than in commercial real estate.

The Coronavirus Recession has made it impossible for many businesses to pay their rent. Real estate professionals need to practice some common sense to avoid triggering a collapse that hurts us all.

The real estate industry is built on credit, and when cash doesn’t flow from tenants to building owners to banks, loans are not repaid to the companies that service those mortgages.

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Mortgage servicers are not the end of the line, though, because they have packaged those loans into bonds and sold them to investors, many of whom have taken loans using the bonds as collateral. If too many small businesses fail to pay their rent, it can trigger much bigger problems.

The threat is real. The U.S. economy will likely contract 7.8 percent in 2020 due to what Deutsche Bank calls the largest decline in consumer and business spending since the Great Depression. Most commercial tenants are service businesses that rely on consumer spending.

“Volatile financial markets and the growing uncertainty of future tenant cash flows have slowed (commercial real estate) activity. Hotels and retail space appear to be most affected,” industry analysts at Wells Fargo wrote in an investor’s note. “Social distancing and the preponderance of stay-at-home orders has severely cut into consumer spending.”

The Great Recession of 2008 started this way in the residential mortgage market. A high rate of residential defaults crushed the mortgage bond market. When a mortgage servicer fails to pay investors, they drag down the value of the servicer’s stock and all mortgage-based bonds.

TOMLINSON’S TAKE: Slide in oil prices could signal permanent change to the energy industry

Value destruction in the $16 trillion commercial real estate debt market could drag down all financial markets. The industry hopes the Federal Reserve will step and buy bonds soon, but billionaire investor Carl Icahn told CNBC television last month he’s betting on a collapse.

“The banks went out and loaned money against a lot of shopping malls, office buildings, hotels, and retail,” Icahn said. “A lot of these bonds now are in grave danger.”

If business people all along the credit chain practice some common sense and innovation, though, they can avert a crisis.

“If you have an overreaction, we’re going to have bigger and deeper problems,” Brad Freels, chairman of Midway, a Houston developer of more than 46 million square feet of commercial and residential properties. “If everybody just sits still and doesn’t panic, we can get through this.”

No one has seen a recession quite likes this one, but with almost 40 years in the business, Freels has seen quite a few others. As a property owner with office, retail, multifamily, hotel, and restaurant tenants, and a developer with mortgages to pay, he is in the eye of the commercial real estate storm.

Companies leasing property need to pay what they can be based on their income and not try to game the system, Freels said. They need to take advantage of every available government program to help them pay the rent and keep employees on the payroll.

Before asking for relief, the business owner should run the numbers and explain what kind of break they need and for how long, understanding that they need to pay as much as they can to keep the credit system on life support.

Property managers need to get creative, Freels added. Landlords need to manage up as much they manage down and know their numbers. Thanks to banking reforms, landlords have more equity in their property than in 2008, which means the mortgage company or bank knows their collateral is good, or at least it was going into the crisis.

Mortgage servicers need to understand that forbearance is better than a foreclosure. Allowing property owners to pay only the interest on their mortgages for a few months and extending the life of the loan is preferable to declaring a default and taking possession of a property no one wants.

Lastly, investors have little choice but to accept lower dividends and share prices. The defining characteristic of the Coronavirus Recession is its universality. No geographic area, industry, or nation is immune from it, so real estate investors have few other places to put their money.

No one is going to make as much money as they were expecting, and many will lose money as restaurants, retailers and other businesses never come back. Now is not the time to get aggressive, only cooperation will cushion the blow for the economy as a whole.

 


Consolidated Asset Management Services Texas, a provider of project and asset management, commercial and operations services to the power generation, exploration and production and midstream sectors of the energy industry, subleased 46,607 square feet at downtown’s One Shell Plaza, 910 Louisiana, from Shell Oil Co. Adam Grimm, Andy Iversen and Audrey Selber of Newmark Knight Frank represented the subtenant. Cushman & Wakefield represented Shell. The company is currently headquartered at 919 Milam.

Holland’s Road LLC purchased five acres at 6753 FM 2920, Spring, from DL Lincoln Distillery. Diana Gaines of The J. Beard Real Estate Co. represented the seller. The vacant land, which is off Lee Road, west of Kuykendahl, will be an expansion to the adjacent eight acres under construction for Geronimo Adventure Park. The park, slated to open this summer, will have 16 zip lines across three zip line courses.

Elumatec North America leased a 15,000-square-foot industrial building at 1511 Industrial Drive in Missouri City. Darren O’Conor and Jake Wilkinson of NAI Partners represented the landlord, Bison Warehouses. Stuart Rosen of Greater Houston Commercial Properties represented the tenant.

EcoLab leased 40,320 square feet of industrial space at 13270 N Promenade Blvd., Stafford. JR Tomlinson, Griffin Rich, Louis Pascuzzi, David Creiner and Frank Puskarich of Newmark Knight Frank represented the tenant. Stream Realty Partners represented the landlord, Ranger H-TX LP.

Harrison Street, a Chicago-based real asset investment firm focused on the education, health care and storage sectors, was disclosed as the buyer of the 208,000-square-foot medical office building at 100 Fellowship Drive in The Woodlands. The building was purchased from the Howard Hughes Corp., which developed it for long-term tenant MD Anderson, for $115 million or $553 per square foot.

Overhead Doors Unlimited leased 5,517 square feet at Gessner Business Park in Houston Texas. Jim Autenreith and Sam Rayburn of Moody Rambin represented the owner, Ivest.

Sealy Land Co. leased 1,008 square feet at 7660 Woodway, near Voss and San Felipe. Peggy Rougeou of Tarantino Properties represented the landlord, 7660 Woodway LLC. Melissa Gerber Brams of Gerber Realty represented the tenant.

Wine.com renewed its lease of 18,000 at Willowbrook Distribution Center, 9333 Millsview Road. Boone Smith and Garret Geaccone of Stream Realty Partners represented the landlord, KKR.

North Houston Birth Center leased 5,554 square feet at 3800-4000 N. Shepherd for 15 years. Kat Morrison represented the landlord, Hartman Income REIT, in-house.

Icryo Enterprises expanded at 14200 Gulf Freeway. Dani Allison of Resolut RE represented the landlord.

Amran Inc. renewed its lease of 24,380 square feet at Sugar land Southwest Business Center, 12320 Cardinal Meadow Drive. Steve King of CBRE represented the tenant. Jeff Pate and Jeremy Lumbreras of Stream Realty Partners represented the landlord, DRA Advisors.

Abasi Real Estate Group purchased an 11,300-square-foot industrial building at 15600 W. Hardy Road. John Hornbuckle of Cypressbrook Co. represented the seller, Fontana Investments. Enobong Abasi of Fairdale Realty represented the buyer.

QVAL Property Advisors renewed 10,420 square feet at 15995 N. Barkers Landing for six years. Richard Maloof represented the landlord, Hartman Income REIT. CBRE represented the tenant.

The Jenkins Organization, a Houston-based company that has traditionally focused on self-storage, acquired Austin Oaks RV Resort as part of its expansion into the campground industry. The property, at 753 Union Chapel Road in Cedar Creek near Bastrop, will be rebranded as Great Escapes Austin Oaks. Planned improvements include the addition of 74 RV sites, a new pool, clubhouse, dog park and enhanced common areas.

Bayou City Hemp Co. leased 13,562 square feet in Park Row Tech Center, at 16700 Park Row Drive. Daniel Hollek of Centric Commercial represented the tenant. Jason Gibbons of Finial Group represented the landlord.

A private investor purchased the 3rd Street Village Apartments, a 48-unit complex at 310 Waco Avenue in League City and plans extensive renovations. Jeffrey Fript and Christian Mazzini of Marcus & Millichap brokered the sale.

A limited liability company purchased two apartment complexes totaling 227 units at 2120 Strawberry Road and 3201 Red Bluff Road in Pasadena. Jeffrey Fript and Christian Mazzini of Marcus & Millichap brokered the sale. The buyer plans extensive renovations.

 


Commercial real estate brokers working in Houston’s already struggling office market were hit by yet another challenge when the coronavirus pandemic took hold in the city.

But some are viewing it as an opportunity to reconnect with clients.

Like many business professionals in this time of coronavirus, real estate brokers have become well versed in making video calls from their homes.

“Right now, many clients just want to hear a friendly voice or see a friendly face while they’re stuck at home,” said Taylor Wright, a vice president on the occupier advisory team in Colliers International’s Houston office.

Wright said the number of leases being signed has fallen sharply in recent weeks as both tenants and landlords struggle to determine the degree of COVID-19’s impact on their businesses. But deals are still getting done.

One of Wright’s clients recently signed a lease for a significant amount of space, and he has been hired to handle another lease for a client looking to move into a new space. However, most of the deals that are closing are renewals, he said.

With in-person tours of office space off the table thanks to social distancing mandates, Wright said most clients are holding off on making moves. Add to that the financial uncertainty created by the combination of COVID-19, plummeting capital markets and dismal oil prices, and many businesses are focusing on keeping cash in reserve, rather than paying for costly office build-outs.

That said, Wright views the current state of affairs as a chance to check in on clients on a personal level, without having business get in the way.

“Most of the time, we’ll talk about what they’re watching on Netflix and whether they’ve seen something we haven’t,” Wright said. “No one knows what the impact of all of this uncertainty will be. Sometimes, it’s just nice to see how people are doing.”

The blow to Houston’s office market caused by COVID-19 couldn’t have come at a worse time.

With office vacancies hovering around 20 percent, the market had already shifted heavily in favor of tenants. That has left landlords and property owners scrambling to launch costly remodel projects in order to compete with new, high-end buildings coming online. Many of those projects were already underway when COVID-19 hit.

The largest office project underway downtown is Houston-based Hines’ Texas Tower, which is slated to open at 845 Texas Ave. in late 2021. The 47-story, 1.1 million-square-foot tower is already 38 percent preleased. Law firm Vinson & Elkins has agreed to lease 214,000 square feet, Hines will occupy 155,000 square feet, and law firm DLA Piper is taking a 31,000-square-foot floor.

But even with the challenges facing the market, brokers still have a role to play, Wright said.

“The biggest thing a real estate professional can be right now is a resource for clients who just need information in an uncertain business climate,” he said “Being able to provide knowledge of what the terms of a lease are or where the opportunities are can be a huge benefit for clients right now.”


Eric Platt in New York, Miles Kruppa in San Francisco and Kana Inagaki in Tokyo  –  Financial Times
SoftBank has pulled out of a planned $3bn purchase of WeWork stock, a move that is expected to spark litigation by the lossmaking property group’s co-founder and one of Silicon Valley’s most prestigious venture capital groups, according to people briefed on the matter.

The $3bn share tender was agreed last year as part of a multibillion-dollar rescue package that SoftBank put in place as WeWork was on the brink of insolvency. The tender offer was set to provide a lucrative payout to early backers of the company including Benchmark Capital and Adam Neumann, WeWork’s former chief executive.

Benchmark, Mr. Neumann and other investors were expected to sue over the collapse of the deal, according to people briefed on the matter.

SoftBank said in a statement on Thursday that it had decided to pull out after WeWork failed to meet a set of conditions behind the deal.

“Given our fiduciary duty to our shareholders, it would be irresponsible of SoftBank to ignore the fact that the conditions were not satisfied and to nevertheless consummate the tender offer,” said Rob Townsend, SoftBank’s chief legal officer.

SoftBank added that it remained “fully committed” to the US group’s success and that its decision would not have any impact on WeWork’s operations.

Lawyers for Mr. Neumann, who had the option to sell nearly $1bn of stock in the deal, were informed of the decision on Wednesday, one of the people said. SoftBank is expected to notify other investors who had planned on selling their shares that it has withdrawn from the deal after the tender offer lapsed at about midnight.

SoftBank’s withdrawal marks the latest reversal for WeWork, which at one point was the most highly valued privately held group in the US. WeWork burnt through billions of dollars of cash as it expanded around the world under Mr. Neumann, opening locations in more than 100 cities. Its attempt to go public last year failed, as investors balked at its huge losses and a series of deals that benefited Mr. Neumann personally.

The decision to walk away from the $3bn share purchases will also take away a much needed source of cash from WeWork. SoftBank had agreed to provide $1.1bn of debt to the company as part of the transaction, but only if it completed the tender offer.


James Beard Award-semifinalist Jonny Rhodes may be best known for his smash hit restaurant Indigo, but it’s his new grocery store, Broham Fine Soul Food & Groceries, that he wanted to open first.

The 2,000-square-foot store opens April 1 at 2019 Bennington St., near the Hardy Toll Road and the 610 Loop. It will sell food targeted for individuals of African descent, almost all handmade by Rhodes and his team — and they’ll teach customers how to use the more unfamiliar goods, he said. The intent is eventually for the entire stock to be either handmade or grown by Rhodes. But because the store is opening early to help people amid the coronavirus pandemic, the garden Rhodes is creating for the store’s produce isn’t ready yet.

Products at the store will include sodas, sauces, condiments, pastries, jellies and butter, ice creams and popsicles, deli meat, sausages and dried items like jerky, all handmade. Typical items like dill pickles and hot sauce are sold alongside more unusual fare, like okra seed coffee ice cream and fermented strawberry and grapefruit soda.

Rhodes has never been interested in selling others’ goods. Over time, the store will be 100 percent self-sustainable.

“That way, we’re not buying produce from local farmers; we are the local farmers for our own grocery store,” Rhodes said.

Rhodes and his wife, Chana, are making the grocery store’s savory goods, while pastry chef Meredith Larke is handling all sweets and baked goods.

Meanwhile, Indigo is currently closed until September, which is not unusual for the acclaimed restaurant. Rhodes actually closed the restaurant at 517 Berry Road even before Harris County ordered restaurants to close their dining rooms. He brought over his entire staff — five people — from Indigo to Broham.

“I couldn’t take care of them,” he said.

Rhodes isn’t concerned with expansive growth, at least not right away. With the “grow its own supply” model, Rhodes says Broham is unlike any other grocery store in the country. It’ll take time to get its systems in place.

“We’re not a finished product, and I don’t think we’re looking to be a finished product any time soon,” Rhodes said. “One of the favorite things about Indigo that I’ve loved, and I think that people loved, was that we were open about not being a finished product, but the evolution.”

Rhodes hopes his store, located in the Trinity Groves neighborhood along with Indigo, sets an example for others to grow their own food. He also hopes that it cuts into the force of “food apartheid” — a term he uses instead of the food desert. He learned it from celebrity chef Marcus Samuelsson, according to a recent Texas Monthly article. It means a food shortage created by design, harking back to neighborhoods designed to disenfranchise African Americans. Growing your own food, Rhodes said, would be especially impactful now.


Houston-based Stage Stores Inc. (NYSE: SSI) had its own set of struggles even before the coronavirus pandemic brought much of the retail sector to a halt.

Now, the department store owner is taking steps to significantly scale back operations to reduce costs and preserve liquidity, according to a press release.

The stage has temporarily closed all of its 738 stores as of Friday, March 27. Previously, about 393 stores were closed in compliance with state and local regulations, while the others primarily were located in smaller markets and were operating under reduced hours.

The company operates specialty department stores under the Bealls, Goody’s, Palais Royal, Peebles, and Stage brands as well as the Gordmans off-price brand.

Virtually all employees in stores, field support roles, and distribution centers have been furloughed until further notice. Effective March 29, 87 percent of employees at Stage’s Houston Support Center also will be furloughed. There are 80 key employees who are not subject to the furlough because they perform essential functions, though the release did not specify what or where those roles are. Furloughed employees will not be paid, but they will keep their health and welfare benefits.

Members of the executive leadership team will temporarily have their pay reduced by at least 25 percent effective March 29, and the board of directors members will not be compensated during this period. The end of the pay-cut period has yet to be determined.

In 2018, President and CEO Michael Glazer’s base salary was more than $1.04 million, and his total compensation including stock awards was over $3 million, according to the most recent proxy statement Stage filed with the U.S. Securities and Exchange Commission. The only other named officers in the proxy were Thorsten Weber, executive vice president and chief merchandising officer, and Steven Hunter, formerly executive vice president and COO of Gordmans, who left the company in July 2019, according to a separate filing. Webster received a 2018 base salary of $522,692 and total compensation of more than $1.25 million, and Hunter received a 2018 base salary of $478,461 and total compensation of $872,867. The stage has not yet filed its proxy statement with 2019 compensation.

“With the health and safety of our associates and guests as our top priority, we are taking difficult but necessary actions in a challenging market and in the face of the unprecedented COVID-19 situation,” Glazer said in the March 27 press release. “We are grateful to all of our associates for their dedication and commitment to serving our guests.”


The Houston Association of Realtors has been making changes to help keep the residential real estate market going amid the coronavirus outbreak while also keeping people safe.

HAR President and CEO Bob Hale spoke at a Tuesday, March 24, Harris County Commissioners Court meeting about the need to include residential and commercial real estate among the list of “essential” services exempt from Harris County’s new “stay home, work smart” order. Currently, $2.4 billion of residential real estate is pending sale, with $800 million scheduled to close in the next 10 days, HAR said in a statement.

When Harris County’s written order was released Tuesday afternoon, it classified real estate services among professional services that are essential “when necessary to assist in compliance with legally mandated activities or to further essential businesses, essential government functions, or critical infrastructure.” Even before the order was released, HAR already was developing a platform for virtual open houses and virtual showings, per the statement. The platform would allow customers to watch the tours and open houses on HAR.com at scheduled times, and HAR members would then be able to share the recordings on their agencies’ websites and social media.

“The safety of our members, their clients and families is the most important thing to us during this difficult time,” HAR said.

Even before Harris County’s March 24 order, HAR has been taking steps to adapt amid the pandemic. On March 20, HAR announced that information about open houses would not be displayed on HAR.com for most Texas markets, including Houston and Austin, effective immediately.

“Most of the national real estate franchises and many large brokers have either canceled all in-person open houses or are strongly encouraging their agents not to hold them,” HAR said in a March 20 press release. “Realtors are urged to utilize virtual open houses and video tours to help slow the spread of the coronavirus.”

Many Realtors told the Houston Business Journal last week that they were canceling open houses and opting to show their listings via apps like FaceTime and Skype. Others have begun to post video tours of properties online.


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1 of the 7 offices on this Listing. Photo credit: Alex Ayres Photography

Alex Ayres Photography Privacy Gate

Privacy gate

Break room Alex Ayres Photography

Break room Photo credit: Alex Ayres Photography


Houston’s commercial property values will continue to trend upward in 2020 as demand for development opportunities expands amid the region’s positive job growth, according to Deal Sikes, a leading Houston-based valuation firm.

“Although there are a few exceptions, the real estate market in Houston is headed for another good year,” said Mark Sikes, principal with Deal Sikes. “The region’s economy is healthy and although the energy industry is in a lackluster period, the overall economic outlook is outstanding.”

Houston’s industrial market is attracting interest from around the nation and research indicates that more than 15 million square feet of warehouse space is under construction in the Greater Houston area.

“Prices for land or urban infill development property has risen significantly in recent years,” Sikes said. “Rising land prices have pushed the wave of industrial development farther away from the center of the city and outer suburban land prices have increased accordingly.”

Property values in the urban core of the city remain strong as developers and builders locate buildings for redevelopment or seek sites that are appropriate for new construction, Sikes said.

“Multifamily construction is strong in Houston and researchers report more than 25,000 units are now under construction, although the pace is expected to be slightly more moderate in 2020 as the new inventory is absorbed,” Sikes said. “Investor demand is good and multifamily valuations have not yet peaked in most submarkets.”

Newer office buildings and Class A towers under construction are leasing briskly, although Houston’s office market is the most sluggish sector.

The Texas Medical Center, where more than 100,000 people are employed, is a source of growth for Houston and several hospitals and research facilities are expanding.

“Houston’s commercial real estate values will be on a solid upswing in 2019,” said Matthew Deal, principal with Deal Sikes. “With Houston expected to gain population significantly in the next decade, the long-term forecast must include rising property prices that will be very impressive over the long haul.”


Memorial Hermann Health System, Houston’s largest health system, opened a new 17-floor critical care tower at its Texas Medical Center hospital.

Memorial Hermann-Texas Medical Center’s new tower, dubbed the Susan and Fayez Sarofim Pavilion, began accepting emergency room patients effective Feb. 20, according to a hospital spokesperson.

Susan and Fayez Sarofim, the billionaire behind Houston-based investment firm Fayez Sarofim & Co., donated $25 million for the project — the largest gift Memorial Hermann had ever received when it was announced in February 2018. The Sarofim Pavilion was part of a roughly $700 million renovation and expansion project at Memorial Hermann-Texas Medical Center, according to Memorial Hermann.

“The Sarofim Pavilion enables Memorial Hermann to stay ahead of the fast-growing advances in medicine, keep pace with the extraordinary growth of the greater Houston metropolitan region and, most importantly, meet the health needs of our community for years to come,” David Callender, president, and CEO of Memorial Hermann said in a news release.

The new 17-floor tower has more than 140 patient rooms; 24 operating rooms, including three hybrid ORs; a 335-seat cafeteria dubbed the Arboretum Café; and 900 new parking spots. Sarofim Pavilion also is the new home of the Red Duke Trauma Institute at Memorial Hermann-TMC — one of two adult Level 1 trauma centers in Houston.

Operations for Memorial Hermann’s air ambulance service, Life Flight, moved on top of the new tower. The new John S. Dunn Heliport is 10,000 square feet larger than the old helipad and is capable of handling the weight of a Black Hawk helicopter.

“As the Houston community is growing by leaps and bounds, the need for access to quality health care increases exponentially,” Susan Sarofim, chair of the Memorial Hermann Foundation board between 2015 and 2017, said in the release. “Memorial Hermann has stepped up to the plate to deliver a new facility with greatly increased patient capacity and state-of-the-art equipment. Fayez and I are so proud to support Memorial Hermann as the health system continues to deliver award-winning, innovative care to the Houston community.”

Construction began on the Memorial Hermann-TMC expansion in 2015. The building of Sarofim Pavilion took over 5,500 workers and 3.5 million man-hours, according to Memorial Hermann. Houston-based Vaughn Construction served as the project’s general contractor.