Commercial real estate has been altered by COVID-19. Some of the changes we’ll undergo in the coming months and years may be challenging, while others will be more straightforward and quickly embraced. And while many of these shifts were already happening and have accelerated during the health crisis, that doesn’t lessen the impact. Uncertainty has been the buzzword as of late, but as we approach a post-COVID-19 world, there is one thing for certain – there will not be a “return to normal.” Instead, we must create a “new normal,” and here’s what that may look like.   Logistics of the Deal | Deal activity never fully halted this spring, but with the recent uptick in transactions, it’s clear that the process of working a deal has and will continue to change. Tasks related to due diligence and closings were disrupted with travel bans and other restrictions in place, forcing developers, investors and brokers to get creative. Thankfully, today’s technology is more sophisticated, cheaper and more accessible than in days past. Even those who were slow to adopt FaceTime tours or e-closings, for example, have embraced today’s resources that allow people to close deals more efficiently. This will be a lasting trend – as fund managers and investors have been thrown into the deep end of the pool, we’ll see more people accelerate their adoption of PropTech.   Usage Redefined | National retailers filing bankruptcy is a trend that started pre-COVID-19, as is creative re-use in the retail sector. Amazon, for instance, has been linked to certain large box retailers for their location networks, and many fund operators are picking up distressed mid-boxes to convert them to self-storage. The bigger story, however, will be the future of office. As usage is redefined due to social distancing and other influences, we will see increased interest in lower cost, lower density suburban locations closer to employees’ rooftops. These may be geared towards specific uses such as meeting and collaboration space, or quiet focus areas over cubicle farms. The hub and spoke model pioneered in retail offers a logical alternative application in the office sector that many larger employers appear poised to embrace.   Buyer-Seller Expectations | Investors took a pause back in March when the health crisis impact was unclear. Under contract deals dropped and some sellers delisted their properties. This swift reaction caused market conditions to shift overnight from a seller’s market to a buyer’s market. Now, despite some clarity returning to the marketplace, there remains a noticeable imbalance in pricing expectations, not as much around cap rates, but rather around former market-standard assumptions of re-leasing, operating expenses, and rent growth – all are driving property-level NOIs lower in seller’s underwriting than buyers’ past experiences. This will continue for the rest of 2020 and perhaps beyond.   Underwriting Process | The last few months have been challenging for lenders. Interest rates are incredibly attractive, but lenders are understandably conservative as they reassess how to underwrite deals in the current environment. With some tenants struggling to pay rent, and others asking for leniency, financial institutions are evaluating their comfort with risk. Going forward, lenders may adjust their practices, perhaps requiring additional assurances from a developer or putting more emphasis on the credit of the guarantor. But building owners will be changing their perspectives, too. Landlords who had unfavorable experiences with their tenants during this crisis won’t soon forget. On the contrary, tenants that stayed committed to their lease obligations will be in high demand with investors.  

Convenience stores and gas stations have been deemed essential retailers during the COVID-19 crisis, causing an increase in investor demand for this asset class Convenience stores were popular investments pre-COVID-19 due to their premium real estate characteristics, such as high traffic locations and hard corners, not to mention the potential tax benefits for the land and building deals. Since COVID-19 hit, c-store interest and activity has picked up even more due to the essential nature of these businesses and the fact that they’ve remained open during the pandemic. New development of c-stores has remained fairly robust, despite COVID-19’s impact, and many tenants in the sector are expanding Of the national and global brands, 7-Eleven is the brand most actively expanding. In recent months, they unveiled a new store concept and announced plans to double their U.S. locations by 2027. They’ve delivered quite a few stores already this year, and more than 60 of their newly built locations are currently available for sale. QuikTrip and WaWa have both announced new locations this year, as have Sheetz and Kum & Go, and some of the smaller brands are expanding too. Especially in today’s market where we seem to be flooded by news of store closings and bankruptcies, the c-store sector provides some positive trends. Continued expansion by these retailers gives real estate investors great opportunities to acquire newly developed assets with long-term leases. Times are changing and today’s c-store sector doesn’t look like it did a few years ago One trend we’ve witnessed in the last decade is a change in deal size. Ten years ago, transaction size for c-stores was closer to the $2.0 to $4.0 million range. Today, most of the transactions we are working are in the $5.0 to $8.0 million range. This trend has largely been driven by the increased sophistication of the assets – as c-stores diversify their product and service offerings to try to compete with traditional restaurants, coffee shops, dollar stores, and even grocery stores, we’ve seen properties grow larger with higher-end build-outs to accommodate and attract more customers. The increased deal size has priced some investors out of the market, but it’s also brought new investors to the table. Looking ahead, the convenience store sector should remain a bright spot for investors This sector will continue to be one of the most sought after in the net lease space for a few reasons. First, the solid real estate locations are incredibly attractive to investors. Secondly, the sector is full of strong credit operators like 7-Eleven, Wawa and QuikTrip, among others. The long-term passive lease structures these properties offer and the potential tax benefits through accelerated depreciation are two more reasons investors love this asset class. And finally, the fact that these tenants are deemed essential retailers is critical. Consumers have an on-going need for gasoline, food, water, and other necessities – if the pandemic continues, and social distancing becomes more challenging in traditional grocery store environments, shoppers may look to stores with lower foot-traffic for their essentials, and c-stores will benefit.  

The most significant impact of the COVID-19 health crisis on commercial real estate is the widespread lack of consensus on property values. After approximately ten years operating in a seller’s market, owners in every sector are asking the question, “what’s my property worth?” Today, that answer is often unclear, especially in the net lease sector where it may be too early to fully understand the pandemic’s impact on pricing trends. However, when assessing the gap between buyers’ and sellers’ expectations, both parties should remember the old acronym that outlines the basics of real estate value: DUST DEMAND | Over the past ten years, the net lease market became so increasingly efficient that wanting to buy an asset sometimes wasn’t enough – in some cases, a buyer had to “need” the deal to successfully acquire it. In the last decade, debt steadily became cheaper and more plentiful, and equity from the U.S. and abroad increasingly flowed from fixed income into all real estate sectors, including net lease. But demand has changed. Net lease investment sales in 2019, according to CoStar, were about 130 percent of those in 2007, which was the end of the prior cycle, and cap rates were 20 basis points lower. Now, according to the IMF, the U.S. economy is projected to shrink 5.9 percent in 2020, and many investors are scrambling to get liquid. Traditional lenders are now tepid about all but the easiest deals, as expressed by some combination of shorter amortizations, lower LTV’s, or even higher interest rates. And a high percentage of the most reliable buyers are simply out of the market, waiting on the sidelines for more clarity or focused instead on managing their existing portfolios. For the 90-day period ending May 31, 2020, commercial real estate sales volumes were down 64 percent compared to the previous 90-day period, with single-tenant transactions down slightly less, at 58 percent, according to CoStar. We’ll have more transparency into complete first half investment trends soon, but expect to see a noticeable drop in activity due to COVID-19. With this shift in demand, we have started to see a shift in pricing. "Although determining the price of an asset in today’s market may be challenging, savvy and agile investors won’t let a gap in buyer-seller expectations keep them from securing a best-in-class deal." UTILITY | Investors buy net lease properties for their passive nature and durability of an income stream. But the demand for some retail services has been throttled by social isolation measures resulting in a drastic curtailment of consumer spending. We witnessed drops of 6.6 percent in March 2020 and 12.6 percent in April. Grocery, pharmacy, and do-it-yourself stores have been impacted the least, with some even reporting upticks in consumer activity, while gyms, theaters, and casual dining concepts, among others, have suffered much more. While many brick and mortar retailers have seen decreased foot traffic these last few months, online retailers have seen a surge of activity. Amazon, for instance, estimated that America’s forced isolation this spring accelerated the adoption of online purchases for home delivery by several years, and the increased focus on logistics puts the industrial sector in the spotlight. Previously favored for its relatively low basis and carrying cost, warehousing is integral to the pivot to e-commerce. Manufacturing varies by the industry it serves, with consumer durables like autos and appliances suffering, along with the energy sector. But food manufacturing and other consumer staples deemed essential have generally been robust. The biggest post-COVID-19 question mark is the office sector. The last three months have likely changed the way we will allocate and utilize office space in the future. Companies have discovered that their employees can work effectively from home, and many employees want to continue working from home. If sharing workspaces in an office environment can be safely managed, we could expect to see smaller space requirements from corporate users going forward. As buyers and sellers attempt to value office, industrial and retail assets in today’s environment, it’s critical to take into account the property’s utility, as this characteristic can have a significant influence on where the deal might trade. SCARCITY | In unstable markets, we regularly see a flight to quality. Investors want leases with tenants whose services are in high demand, who haven’t overbuilt or expanded too quickly, and who have the fewest competitors. This quality is almost always reflected in strong credit metrics, and in an economic downturn, best-in-class assets are logically the least affected, hence the familiar phrase “Tiffany doesn’t go on sale.” That’s why, for the 90 days ending May 31, 2020, average cap rates for the net lease sector actually declined 20 basis points. But the highest quality assets are scarce. There are fewer properties that meet the criteria of discerning investors, and when these assets do come to market, they are purchased quickly. In the retail sector, long-term ground leases with strong credit tenants in the fast food and retail bank categories are feeling little pain. For industrial assets, virtually any credit tenant focused on distribution is also performing well. In the office sector, government leases for point-of-service agencies are in high demand as are mission-critical customer service facilities for investment-grade corporations. Owners looking to sell these best-in-class properties, or those in high demand categories with low on-market supply, are well positioned to achieve favorable pricing in today’s market. TRANSFERABILITY | Typically expressed as encumbrances to selling the property, in the highly efficient net lease market, transferability also refers to the features of the investment that make it less desirable than the competing alternatives. Characteristics like shorter lease terms, or those with fewer than ten years remaining, generally limit financing to banks, including recourse, and can narrow the buyer pool for these deals. Similarly, tertiary locations are sometimes discounted heavily as buyers and lenders assess the tenant’s rollover risk. Net rents that are difficult or impossible to find comparables for are often also a red flag. In today’s market, lenders are much less tolerant of any deal with hair on it, and all-cash buyers are well positioned to take advantage. The current climate is testing the popularity and resiliency of net lease real estate like never before. With short-term debt in the mid-two-percent range and long-term debt in the mid-three-percent range, leveraged returns compared to alternative investments may never be higher. For otherwise transferable assets, it’s an ideal time to buy term from your tenant and maximize value. Aggregate demand is down, but best-in-class properties have experienced very little, and in some cases no, value degradation. Although determining the price of an asset in today’s market may be challenging, savvy and agile investors won’t let a gap in buyer-seller expectations keep them from securing a best-in-class deal.

We have reached a unique time in the net lease investment environment due to COVID-19 – tenants are seeking rent relief, investors are taking capital off the table, and lenders are pulling back. There is a litany of questions around where the market goes from here as the environment continues to prove uncertain at best. But where do zero cash flow structured assets fit in this rapidly changing marketplace?   Zero Cash Flow: The Basics What is a zero cash flow property? A zero cash flow property, or a “zero,” is a highly leveraged asset with in-place, assumable, fixed-rate, long-term financing (typically 15-25 years) backed by a bond-style, absolute net lease guaranteed by an investment grade credit. The high leverage nature is such that all NOI goes directly to servicing the debt. Appropriately coined, zeros are commercial properties that produce no cash flow to the owner.   Who buys zeros? Zeros can be attractive to several investor types, though the largest pool of buyers are those with a 1031 exchange need. A zero is attractive to exchange buyers who have little or no equity, seeking to fulfill their trade need by replacing a significant amount of debt with as little equity as possible. An exchange buyer with a larger amount of equity may seek a zero in order to use the paydown/readvance feature provided in the loan, allowing the buyer to right-size the debt and equity requirements of the trade and extract a significant amount of tax-free equity once the exchange is completed. A non-exchange buyer may be looking to purchase an asset that will produce net tax losses, off-setting income elsewhere in the owner’s portfolio.   Zero Cash Flow: Frequently Asked Questions Commercial real estate has obviously been impacted by COVID-19. How are zeros performing? The commercial real estate industry has definitely been impacted, and the affected asset types have been well-documented, but zeros appear to be insulated so far. There are countless stories of tenants requesting rent relief or abatement, but we have yet to see this on a zero. With the market’s instability, buyers are seeking a flight to credit quality, and the investment grade quality inherent in zero cash flow assets strengthens the appeal to buyers in today’s environment. With the current market uncertainty, why zeros? The phrase “cash is king” has never been more true than it is right now, as we’re seeing investors place great importance on liquidity. Because zeros require minimal equity, they are the most economical way to purchase a net lease asset, obtain a long-term lease, and defer your tax burden. Furthermore, utilizing paydown/readvance with the purchase of a zero will net the investor additional liquidity that would have otherwise been tied up due to exchange requirements. Zeros can also be a great solution for 1031 exchange needs resulting from deed-in-lieu or foreclosure scenarios. Both are considered by the IRS to be a sale of the asset to the lender, resulting in possible gains that can be deferred by a 1031 exchange. Lastly, a cornerstone of a zero cash flow asset is its long-term, non-recourse, fixed rate financing that is readily assumable. Because zeros are acquired with an in-place loan, the investor isn’t restricted by the lack of financing options currently available. Does today’s market benefit zero cash flow buyers or sellers? The short answer is, “both.” The net lease market has been challenged in recent months as a result of weakening tenant credits. This is juxtaposed by significant demand from an unusually high number of 1031 exchange buyers as a result of currently extended exchange timing requirements. This results in a market that is prime for zero cash flow transactions for both buyers and sellers. Sellers can take advantage of a market that is still producing attractive pricing from buyers hungry for quality credit, while buyers can retain as much equity from their relinquished property as possible by replacing that asset with a zero while utilizing paydown/readvance. What does the future of zeros look like? We don’t have a crystal ball, so predicting where the market goes from here is quite difficult. However, we do know that zeros continue to be attractive, and the market remains strong at more than $2.0 billion per year in transaction volume. As long as properties are being sold and resulting 1031 exchanges need to be fulfilled, there will be a market for zero cash flow assets.  

The term “buyer’s remorse” often describes a situation in which someone regrets having purchased an extravagant item or unnecessary service, but these same feelings can also come from missing an opportunity or failing to act when the time is right. Too often in our more than 30-year history, we have heard clients say, “if only I had purchased that asset when I had the chance.” Knowing how to time the market is by no means an exact science, but when conditions shift to a buyer’s market as quickly and dramatically as we’ve seen in 2020, capitalizing on new opportunities can be easier than you think.   What makes today a buyer’s market? In a normal market cycle, the pendulum swings back and forth from a buyer’s market to a seller’s market very gradually, often over the course of several years. But when outside influences strike fast, market conditions can quickly shift. The most recent inflection point caused by today’s health crisis occurred in mid-March when businesses were closed, and shelter-in-place orders were issued. Unemployment rose drastically in the weeks following, and the stock market witnessed some of its most volatile days in history. The economic impact of COVID-19 altered market conditions so drastically that it became a buyer’s market seemingly overnight. Uncertainty and consumer fears are, for the time being, driving opportunities, and savvy investors are well positioned to take advantage.   What opportunities are available to buyers? For investors still active in the market, we’ve begun to see a flight to quality, and the most desirable assets are continuing to trade even though we’ve seen overall volume and activity decline. Not surprisingly, those properties in highest demand are leased to essential tenants with strong credit. Leading the charge are drugstores, essential medical providers, grocery stores, home improvement stores, convenience stores, some automotive retailers, as well as some restaurant concepts. Owners of these assets who have been sitting on the sidelines looking for the right opportunity to sell have found it – their properties are in very high demand and if buyers act fast, they can secure themselves a very desirable investment that may not have been available in a more stable environment. Furthermore, turbulent times often cause the highest-quality properties to come to market. Owners that never intended to sell, for example, may be forced to, which can create a “once in a lifetime” opportunity for buyers. And if the owner is truly pressed to sell, these unique properties may even be offered at a discount.   What challenges will buyers face? Today’s opportunities don’t come without challenges. Financing, despite incredibly favorable rates, may be difficult to obtain in some situations. Lenders who are slow to act may jeopardize a buyer’s ability to close successfully, resulting in a missed opportunity. Similarly, working with the wrong seller can derail a transaction, so it’s vital for buyers to work with brokers and other professionals who have deep, established relationships with sellers. But the greatest challenge buyers can face in uncertain times is themselves. Having confidence in your long-term investment strategy is important but being willing to act when the perfect deal presents itself is key. Any disruption in the market creates opportunities for investors, and there’s no doubt that we’re experiencing a significant disruption. But how long will it last? We entered this period of uncertainty with incredibly strong market fundamentals, and it’s possible that underlying strength could be enough to buoy a fast recovery. If that’s true, the window of opportunity for investors could be very narrow. Those who are well positioned to take advantage of today’s opportunities are encouraged to do so quickly. Otherwise, they risk looking back on these tumultuous times with remorse.    

Since January’s first reported case of COVID-19 in the U.S., our economy has experienced massive volatility. We’ve seen unemployment numbers surge and millions of businesses closed with, by some estimates, at least three percent of all restaurants closing their operations permanently. Uncertainty is the new normal, at least for the moment, as professional analysts and arm-chair prognosticators try to predict when businesses will be permitted to reopen on a wide-scale basis and what will be the extent of the long-term damage to the economy. Unfortunately, there is no magic formula or any single event that is likely to jump-start the economy and quickly take commercial real estate investment sales activity back to levels we saw pre-crisis. In the meantime, one group of investors continues to be active in the market – 1031 exchangers – and their continued activity makes them a very essential part of our recovery. Since it was first introduced in the 1920s, property owners have utilized Internal Revenue Code 1031 to defer taxes on capital gains by exchanging the sale proceeds and retired debt of real property into like-kind property. As a result, 1031 exchanges have become tremendously valuable in providing investors a method for keeping more of their investment dollars, allowing those dollars to work for themselves and the overall economy. Additionally, 1031 investors help to support property values by keeping a steady supply of buyers in the marketplace that are motivated to act within the timing requirements of their individual exchanges. At the onset of the health crisis, 1031 exchange activity, with all other investment sales activity, saw immediate and significant declines. Some estimate 1031 closings dropped as much as 33 percent in the mid-March to mid-April timeframe. In the coming months though, investors will regain their confidence, and they’ll take advantage of the recent deadline extensions that pushed both the 45-day identification deadline and the 180-day closing deadline to July 15 for all 1031 exchanges with original deadlines falling between April 1 and July 14. With renewed confidence and longer timelines, experts predict we’ll see an increase in 1031 exchange closings as we approach summer, especially as today’s market conditions drive a flight to quality. As exchangers hunt for high-quality investments, they will undoubtedly turn to the reliability and predictability of net lease properties, which can provide minimal to no landlord responsibility as well as consistent income from strong-credit tenants with solid balance sheets. While not without risk, many tenant sectors in the net lease space continue to thrive. Some of today’s essential businesses include drugstores, grocery stores, dollar and discount retailers, and home improvement stores. Also faring well during the COVID-19 crisis are essential medical facilities like dialysis and urgent cares, along with last mile logistics and much of the industrial sector. And buyers can easily find high-quality net lease assets for sale across all these property sectors and more, even in today’s environment. To what extent the 1031 buyer will contribute to the recovery of the economy and the commercial real estate sector in the latter part of 2020 and into 2021 remains to be seen. For the past several weeks, buyers and sellers alike have paused on pending transactions to reevaluate the marketplace and their willingness to move forward. However, as we slowly approach what we hope is the end of the pandemic crisis and begin the recovery process, we believe that the 1031 buyer will continue to play a very essential part.  

Over the 30-year history at Stan Johnson Company, we have had the privilege to serve thousands of investors through the ups and downs of the commercial real estate market. With COVID-19 shutdowns impacting the CRE investment markets, we are actively engaging with clients to strategize and provide them with the best advice we have gained by successfully managing through past downturns.   What advice would you give to investors today looking ahead? Without a doubt, conditions have shifted to a buyer’s market overnight, which will present buyers with tremendous opportunities across many real estate asset classes. Structurally speaking, the long-term investment horizon still looks bright, so don’t be afraid to invest confidently. While debt may be temporarily more difficult to access, the good news is that interest rates should remain at historic lows for some time. Available inventory across most product types is approaching all-time highs – we have over $4.0 billion of product available for sale or under contract right now, and we’ve added to it every week since the COVID-19 shutdowns began. Finally, competition for assets in the market is falling fast, which should favorably impact pricing in the coming months for buyers. RCA reported a 65 percent drop in unique buyers for the month of March, and while we’re also seeing declines in digital market metrics, it’s not at that scale. During the Great Recession of 2008-2009, many of our highly successful clients set an investment thesis early in the cycle, determined the underwriting they were comfortable with, and boldly pursued assets that fit their strategy. By getting out in front of the market, they positioned themselves to strike when pricing changed and even to purchase generational assets off-market by being first in line.   While that advice may sound good for buyers, should sellers be expecting to take a discount on pricing? In general, it’s too early to tell what the fallout might be, but in previous downturns, we have seen a flight to quality. Specifically, in the net lease market we would expect the very best credit assets to have minor, if any, price discounting but more available inventory. For good credits, we are expecting them to reprice but eventually sell. And with lesser credits, the location and use will be more critical. In good times, most of these assets get sold, but we expect in today’s market only those with pricing based on real estate fundamentals and critical use will sell.   What steps do you recommend investors take now to position themselves for the "next cycle"? There will inevitably be a lot of opportunity that will come out of this current environment. To ready themselves for the next cycle, investors should maintain or create liquidity. They should spend time with their lending and equity sources to determine their readiness to perform when called upon, and engage with intermediaries that can source the type of product they have an interest in. If you have the capital, be bold in pursuing top assets by putting yourself at the front of the line when one does come to market. For assets with good credit that remain sellable, consider selling out of them if you have a good alternative to reinvest. Don’t let a small loss offset a large potential gain. Finally, for assets with sub-investment grade credit or operations currently shuttered by government orders, keep your eyes focused on the horizon. Businesses will adapt, and customers will return – and when they do, those business operations will return to profitability and a stable rent environment. Investors who have appetite for some risk should be making the best assessment they can on tenant financial viability and scouting for opportunity. As I look ahead, I realize the biggest lesson I learned from the last downturn was the investors who embraced the current market challenges, readied themselves and their team, and were prepared to actively transact were handsomely rewarded in the subsequent cycle.  

Nearly overnight, “uncertainty” has become today’s buzzword. As the threat of COVID-19 becomes more widespread by the day, we’re seeing the financial markets react and investors question their strategies. As with any significant event that impacts consumer and investor confidence, it’s natural to see individuals and companies take cautious action or delay important decisions. Immediately, and in the coming months, investors may be tempted to adopt a “wait and see” attitude, but those who do risk missing out on opportunities. Below are five key reasons why real estate investing makes sense in today’s market, coupled with expert advice to help you invest with confidence.   Commercial Real Estate is a Long-Game In a market experiencing volatility, we expect to see more and more investors seeking a safe haven. It’s unclear if recent stock market declines will be recouped quickly or over time, but for those seeking higher yields with lower risk, commercial real estate assets must be considered as investment options. “Investors – particularly net lease investors – should focus on what the sector has historically been good for: long-term leases, stable tenants, and strong demographics,” says Asher Wenig, Senior Director & Partner. “Whether you’re focused on net lease or other CRE sectors, stick to good real estate fundamentals and play the long game.”   Strong Economic Fundamentals Market conditions are in our favor. Unemployment is low, and GDP was up 4.0 percent in 2019, continuing on its more than 10-year growth trend. Predictions currently suggest that near-term economic growth will slow temporarily which could indirectly impact real estate investment volume. At this point though, it’s likely that confidence will return fast once the threat of COVID-19 is controlled, and the year could be back on track soon enough to see reasonably strong annual investment sales totals across the commercial real estate industry. “Even if we witness a pause that causes activity levels to be lower than predicted, the market is well positioned to have a positive year overall, given the momentum that carried over from 2018 and 2019,” suggests Lanie Beck, Director of Corporate Research, Marketing & Communications. “We have already seen a strong start to the year across the single-tenant net lease sector, compared to the last two years, with more than $13.0 billion in investment sales volume reported, and first quarter hasn’t even ended yet.”   Interest Rates are Incredibly Low Recent cuts to interest rates will help support economic growth and activity, and “our view is that lender rates will remain at historic lows for the foreseeable future,” says Josh Campbell, Senior Vice President. “However, for those buyers expecting further declines in interest rates, that’s probably unlikely.” Therefore, there’s no time like the present. “We are sensing, and encouraging, increased urgency on all deals in this environment, but this is particularly true of leveraged transactions,” advises Anne Perrault, Director. “Time is of the essence more than ever, given the rapidly changing conditions. Buyers will want to secure loan commitments quickly and realize that lenders may work more slowly than usual in some cases.” “We are hearing from our mortgage contacts that life insurance loans will not chase the government rate cuts below the mid-to-low-3.0 percent range and will still require at least 35 percent real equity from their borrowers,” says Craig Tomlinson, Senior Director & Partner. “CMBS lenders are slightly more expensive at 3.5 to 3.7 percent for 70 percent loans, while banks have the highest rates in the high 3.0 percent range.”   Quality Real Estate Is in High Demand If you’re a seller in today’s market, your asset could be in high demand. Recently, there has been an imbalance of supply and demand, as the highest quality properties trade fast. According to Associate Director Katie Elliott, “many of the larger REITs have commented that they still have capital to deploy,” suggesting they intend to remain active in the market. Another group still hungry for quality investments are 1031 exchangers. A quick shift in market conditions does not erase the desire for tax savings, nor will it stop exchange transactions from occurring in the short-term. As investors look to trade out of one asset and into another, savvy buyers will continue to benefit from newly listed, high-quality real estate assets and should be encouraged to pursue those deals with earnest.   Opportunities to Diversify Investment advisors have always recommended diversification as a way to minimize risk, and that advice holds true for commercial real estate investors. If your portfolio is heavily weighted towards a single, specific asset type, now would be a great time to diversify. “Consider purchasing an anchored retail center with a grocery component or other ‘necessity’ retail service tenants,” says Margaret Caldwell, Managing Director & Partner. “These centers are still trading at historically low cap rates which are expected to remain low regardless of COVID-19’s impact. Investors chasing yield will be able to take advantage of low interest rates and receive highly levered returns by investing in power centers and other multi-tenant retail.” Pat Weibel, Director, echoes these thoughts. “Freestanding grocery and grocery anchored centers will be very popular in the short-term, as will last-mile logistics facilities. The focus these last few weeks have been on ‘flight to quality,’ but that’s good advice to follow when considering your long-term investment strategy too.” Regardless of the current mix within your real estate portfolio, today’s environment should prompt all investors to evaluate their level of diversification and seek to purchase assets that will help them minimize risk in the long-term.