In many ways, it’s hard to believe this roller coaster of a year has come to a close. Despite the hardships faced as a result of the COVID-19 pandemic, there are many examples of creativity, evolution and camaraderie to admire within the commercial real estate industry. It’s important to reflect on the lessons learned this year and how some pandemic-inspired trends will continue to shape not only real estate activity, but also our daily lives in the new year.
Heartland Real Estate Business posed a series of questions to Midwest-based brokers to learn their most valuable lessons, top transactions and outlooks for 2021.
Participants included Isaiah Harf, Regional Director and Partner in the Chicago office of Stan Johnson Company [among others].
Heartland Real Estate Business: In what ways did your role evolve this year as a result of the pandemic?
Isaiah Harf: After March, there were no in-person office meetings to lead or in-person strategy sessions about how to grow our business in a particular sector. Zoom took over for these specific meetings, and the common theme that prevailed was perseverance. Our team has tried to recreate camaraderie through Zoom calls, screen sharing and forced collaboration, but I’ll be the first to admit that it’s been challenging.
For those of us in leadership positions at brokerage houses, this year was as much about being a therapist as it was about being a broker. Coaching and empathy are both important, and you have to lend your ear to those who have not been in the business through multiple cycles or dips in transaction volume and make sure they know there is light at the end of the tunnel.
We were lucky and fortunate to be in the net-lease space, and many of the tenants who occupy the buildings we sell were deemed “essential.” Some of these tenants thrived, but for many this pandemic has altered their lives forever. Many tenants are gone for good. Our business at a company level is off just a fraction headed into the last month of the year. We are the lucky and grateful ones. This year was about leading, but in a different way. This year taught me that listening is leading. And when this pandemic is over, Stan Johnson Co. will be positioned stronger than ever.
HREB: What do you view as your most noteworthy transaction this year?
Harf: We sold a single-tenant, flagship grocery store – with roughly $3 million in net operating income – that closed peak-pandemic, but I’m under a strict non-disclosure agreement on that one.
Maybe my favorite transaction this year was selling Barilla’s U.S. office headquarters here in Northbrook, Illinois. The single-tenant office asset is five minutes from my house, has incredible signage on a major interstate (which doesn’t allow for billboard signs, making the signage all the more valuable) and the building smells amazing at all hours of the day. There are full live demo kitchens inside for testing their product. It is such a unique facility. (Barilla is an Italian food and pasta company.)
HREB: What is your outlook for 2021?
Harf: For the net-lease market, more of the same. We see a real trifurcation in the marketplace. The first tranche includes buildings with tenants that simply don’t have the longevity of satisfying their lease obligations, and COVID-19 has put the weaknesses of their concepts on full display. These buildings will continue to languish on the market. Cap rates will rise, and to clear the market they’ll be higher than people think.
The second tranche of buildings will see a resurgence in 2021. These are buildings occupied by tenants whose operations will get healthier and healthier with a vaccine available. Pre-pandemic, these buildings may have been viewed by the marketplace as just as valuable as those that were completely unaffected by COVID-19. But now they will remain slightly less desirable because COVID-19 exposed the asset class or tenant as not being completely safe.
The last tranche includes the Costcos, Targets, home improvement stores, Walmarts and Fortune 50 distribution warehouses of the world. These are the biggest creditworthy tenants and the bulletproof assets. These cap rates, coupled with continued basement interest rates and a huge propensity for interest-only debt, will keep valuations for these buildings at record levels. The mandate to get capital out into the marketplace chasing these few assets will continue to drive pricing.
The year 2022 may be very different, especially if we start to see even a small climb in interest rates. But for at least one-third of 2021, most of the world isn’t going to be vaccinated yet, and I can’t see it being much different than the world we live in today.