Covid-19 impact on the real estate sector

Fred Scott, Advalurem Group Principal, joined Yahoo Finance to discuss how the real estate sector is handling the coronavirus pandemic.

Video Transcript

JEN ROGERS: As we've covered the weekly jobless claims coming in over $5.2 million, and when you don't have a job, it's really hard to pay your rent. We're going to talk about real estate right now. I want to bring in Fred Scott with the Advalurem Group. Fred works in office space, but also in multi-family.

Fred, I first just want to ask you about people and companies not paying their rent because we've had headlines, whether it's WeWork saying that some of their tenants haven't been paying rent or Hudson Yards talking about retailers, what are you seeing in terms of rent non-payments so far?

FRED SCOTT: Yeah. Good to be with you, and thank you for having me. Yes, certainly I think that this is starting from the ground up, the grassroots, and people sren't paying. We're starting to see in our portfolio-- and we've got just under a million square feet of real estate. We are seeing on the multi-family side about 10% that have reached out in the month of April to find some assistance. And then on the office side, we have about less than 3% of the portfolio.

I think-- and that's to be expected. I think in the office, we've just been able to sort of invest in trends and in cities that cluster around health care or tech, which while nobody is currently in the office at the current time, I think the long term prospects are pretty strong.

ANDY SERWER: Hey, Fred. You're starting to hear this narrative, which is maybe becoming conventional wisdom consensus, that urban real estate office buildings is going to be just something that is going to have the wind in its face for the foreseeable future. No one is going to want to cluster in urban areas anymore. And that, you know, on the margins, this is certainly not going to be a growth business at all. What's your take on that?

FRED SCOTT: You know, I think it's probably overdone a bit, just like I think that the depth of the suburban markets was a little overdone. I think you have to look at the fact that the office usage will change going forward, and you can do more with less space. And you'll have those commuter workers or people working from home, that will accelerate, in which you'll probably find is a bifurcated market.

So when you look at Hudson Yards, you're looking at retail. But their office buildings are successful. It's modern space. There's a lot of construction going on in New York in general, but certainly with Hudson Yards. But they pulled tenants out of Midtown, and some of those buildings are older '80s, early '90s building, larger floor plans for a time that, you know, you don't know if you can go back. But certainly do you have the growth there to backfill that space at rents that justify values?

AKIKO FUJITA: Fred, I'm wondering if we can get back to residential real estate. You know, we-- in many ways, some of these major cities have made the decision for the renters by saying that banning eviction. So essentially even if you don't pay rent right now, they can't be kicked out of their homes.

You know, my concern is or my question is, what happens three months down the line or four months down the line when those orders are lifted? Rent is due because rent is not dismissed. Are we likely to see a huge wave of homelessness? I'm not sure if that's something that you can answer, but I wonder what you see down the line.

FRED SCOTT: I mean, I think you bring up a bigger point in general about the need for more affordable housing, particularly in New York. But certainly I think from our perspective, now we look at it as certainly, we're all in-- we're all dealing with this in the same way-- in very similar ways in the sense that we're all sort of affected by this.

I think that to the extent that we are working with those people who cannot pay currently, who are furloughed or unemployed to get through this point. But certainly, if you then tell me my lender will then look favorably upon me if my tenant is, then I can sort of follow suit. But I'm bound by a legal agreement, my mortgage. And so, you know, it's a tough place to be.

And I think that, you know, not that we're going to kick the can down the road, but it's something that as duration goes on, there'll be more problems that we'll have to solve. But certainly, I think as a landlord, we're sensitive to that.

RICK NEWMAN: Hey, Fred. It's Rick Newman. There's been some reporting about financial stress in the commercial real estate market with concerns about some defaults that could affect CLOs, collateralized loan obligations, and all of those types of things that normal-- that we normal people don't understand. But obviously, this brings us back to the concerns of, you know, could we see something like in 2008 again? What's your read on that?

FRED SCOTT: I think hopefully we've learned our lesson from 2008. I think the difference there, as you sort of look at this-- and certainly I think the Fed is starting to step up some some asset purchases to bring in liquidity to the market. And hopefully, you'll start to continue to see that stabilize a little bit. But certainly, it is a general concern, but I don't see that quite as much as I see the idea of just jobs.

And I think that's whereas in '07, you really had just, if we bought assets and it was a banking crisis. This I think we need to get people back to work and spending. And so there's sort of a convergence of top down and bottom up.

JEN ROGERS: Is there any part of the market that concerns you the most? Is it-- we've talked about the retail apocalypse before. Or is it a pocket, say, like, student housing? I mean, we're doing so many stories about colleges and how they are under financial stress. But what about all the student housing right around them? Or is it multi-family? What part concerns you the most?

FRED SCOTT: All of it. I mean, I think it's broad-based. And you know, it concerns me, but then I also think that I tend to be a little bit more positive. And I think we'll get out of this to a new normal. But certainly, things that were already in motion will accelerate.

So use of office space, certainly student housing is something that you mentioned that we're not talking about right now, but certainly there is a pocket of leasing for those buildings. And then if you don't hit that or somehow, there's cuts, you've got issues down the line with that. But certainly, I'm not, you know, panicking. But certainly, I think there's concern across the commercial real estate sector.

JEN ROGERS: Fred Scott with the Advalurem Group, I hope we can get you back on when things are turning around, and you're not worried about everything. It's good to end on a little bit of a positive note there. Thanks a lot, Fred.

FRED SCOTT: I look forward to it.