Richard Acosta, CEO of Subversive REIT, recently raised $225 million for a public REIT (real estate investment trust) dedicated to the cannabis industry and recently spoke with Connected Real Estate Magazine about Coronavirus’ impact on the CRE industry now and in the future, how landlords can get through this trying time and more.
Connected Real Estate Magazine: How is COVID-19 affecting commercial real estate and public markets?
Richard Acosta: Quite frankly, COVID-19 and the impact on the markets are causing a material slowdown. Lenders and investors are hitting pause or cancelling deals, as there is uncertainty in the broader capital markets and the expectation of an increase in vacancy rates and loan defaults across most CRE sectors. When you don’t have buyers or when buyers have a hard time closing deals due to challenges securing debt financing, you end up with sellers growing more motivated leading to potentially lower prices over time.
Publicly traded commercial REITs, in general, have sharply traded down over the past few weeks, especially REITs focused on the riskier areas of the economy – hospitality REITs and retail REITs specifically have been crushed. On the flip side, you have cannabis and data center REITs faring well. For example, the singular public cannabis REIT is one of the few REITs up on the year, supported by expectations that cannabis industry sales perform in this recessionary environment similar to alcohol and pharmaceutical sales. On the private CRE side, we have seen a slowdown in activity and expect some level of asset re-pricing if we enter a prolonged recessionary period.
Connected: What will the CRE industry look like on the other side of COVID-19?
RA: The CRE industry as a whole may look quite different once we are beyond COVID-19. Transaction velocity, lease rates and pricing will depend on how long it takes for the economy to “get back to normal” and where lending rates and overall economic strength are at that point.
On the cannabis CRE front, we expect a significant amount of corporate recapitalizations and possibly forced M&A as a result of the constrained capital markets environment. We are being exceedingly selective in our investment activities and are solely focused in working with the best and strongest credits that will thrive during this unprecedented time. We expect to see that many of our tenant partners become consolidators as M&A picks up, especially as distressed cannabis companies become available.
Connected: What can CRE owners do to weather the storm during this trying time?
RA: Communicate often and early in order to avoid surprises and allow for the possibility of constructive solutions. What we have done as landlords within our private vehicle, Inception REIT, is to make sure that our tenants know that we are here to help. We have invited our tenants to deliver any bad news or issues early so that we can try to be of assistance.
Additionally, most commercial real estate owners are bank borrowers. Make sure you’re communicating with them as well. Banks can work with you if you have mortgages – the key is communication.
And, if you do find yourself in a situation where you need to be flexible with tenant lease payments, find a way to do that constructively in a way that lets that obligation be deferred, but made whole over time as an example.
Connected: Anything else you’d like to share that would be helpful to the CRE industry?
RA: Within cannabis commercial real estate, I think early trends post the onset of COVID-19 include the need to shift operations toward online ordering, delivery and curbside pickup as opposed to continuing to use stores as the sole distribution medium. I think what’s interesting about that is that those consumer behaviors may be shaped for the long term. Also, many states designated legal cannabis dispensaries as “essential” businesses and given that, I do think that cannabis retail will continue to outperform.
I think we are going to find more retail landlords willing to embrace the cannabis industry. If you’ve got good retail real estate and you happen to be in a green zone, you may have the opportunity to bring in a cannabis tenant that will pay above market rents while achieving sales per foot numbers that very few tenants outside of Starbucks and Apple can achieve.