Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - How COVID-19 Has Impacted Real Estate

Tyler Stewert
September 14, 2021
Podcast - How COVID-19 Has Impacted Real Estate

Troy Merkel, Partner at RSM, joined us on the podcast to discuss how COVID-19 has impacted real estate.

Troy has 15 years of experience in audit and consulting, with a particular emphasis in real estate and financial services reporting, in accordance with US GAAP, IFRS, NCREIF PREA Reporting Standards and income tax basis. He is also an expert in accounting for asset acquisitions and complex leases and specializes in various tax-advantageous, in particular Opportunity Zones and government subsidized deal structures.

Troy’s financial services background involves audits of private equity funds, which hold equity or debt interests in a variety of industries including technology, consumer products, personal services, real estate and renewable resources. His expertise includes complex valuations, mezzanine and first lender analysis, as well as, the evaluation of options.

In 2018, Troy was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders. Troy’s focus is on the real estate industry.


Click here to see the latest research and reports from Troy and his team at RSM.

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RealCrowd (00:00):
All opinions expressed by Adam Hooper, Tyler Stewart and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only. It should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Troy Merkel (00:22):
You start to realize that the demographic growth within the office space was just too fast compared to the population growth. What I mean by that is, there's about 2 to 2.3% population growth within office, whereas the US growth had only been about 0.7%.

Adam Hooper (00:46):
Hey, Tyler.

Tyler Stewart (00:48):
Hey, Adam, how are you today?

Adam Hooper (00:49):
Tyler, I'm good. Home studio again, another episode here from home.

Tyler Stewart (00:56):
Yeah, today we had Troy Merkel, Partner and Real Estate Senior Analyst at RSM.

Adam Hooper (01:03):
Yeah. Troy joined us for a late Friday evening chat here on the podcast. Super grateful of his time to come spend an hour talking about everything that's going on in their space. Some of the things that they're seeing. Troy put out a couple of very recent articles and blog posts. We'll have links in the show notes there. Talk a lot about the construction space right now, what's going on in the construction industry with different levels of activity allowed to go on from some of the essential workers quote-unquote or not in the construction space. And also some of the stimulus programs that we've seen coming out of the government so far, and what those impacts will be on our industry in the real estate space.

Tyler Stewart (01:42):
Yeah. And then Troy also talked about the impact on the human behavior side, and he compares this current crisis with what we experienced post 9/11, where we increased airport security. And 20 years after the fact, we still have that increased airport security. Troy thinks things like sneeze guards or checkout lines and social distancing may continue on well beyond this crisis.

Adam Hooper (02:04):
Right. What are some of those behavioral changes from this period that we're going through that are going to stick? I think that's one of the things we've talked about with most of our guests on the show, is trying to figure out, we don't even know yet necessarily what some of these changes that are going to persist once we get through this health crisis. So I think that's again just something I find very interesting in talking with people and getting their opinions on. One point he noted early on in the show which I thought was very apt was this concept of work-life integration, not necessarily work-life balance. I know a lot of us right now are trying to figure out what that balance is, but there's certainly integration. I think that's one of those points that might be…

Adam Hooper (02:43):
It'll be really fascinating to see how that does persist and what we learn from the ability to work at home, what impacts that will have on our asset class. We talked about apartment sizes. We talked about office space usage and the different impacts throughout these other asset classes within the real estate space. So again, really, really interesting conversation. Check the show notes for links to those articles and some of the other pieces of information that we spoke about with Troy today. And as always listeners, if you have any comments or feedback, or if there's anything that you want to hear us cover on the show, please send us a note to podcast at And with that, let's get to it. Troy, thank you so much for coming back on the show. It's been a while since we spoke. I had you on the podcast before. So thank you for taking some time on a Friday evening here to spend with us and talk real estate.

Troy Merkel (03:40):
Thanks for having me back. I'm excited to talk real estate in these topsy-turvy times we're in.

Adam Hooper (03:46):
It is. Every day is a new adventure. Fortunately for us, and I know you as well, families are healthy and we hope all listeners out there. There's some tough times going on. So first and foremost, thankful for the health of all the folks that we know. Yeah, it is. It's just almost a daily question of how to make sense of this environment that we're in, right?

Troy Merkel (04:11):
Yeah, absolutely. You're right. We're blessed to have a healthy family. My wife and I are still employed and able to continue working. But you're right, we keep getting curve balls every other day. Earlier this week, our governor here in Massachusetts informed us schools are done for the year and more impactful for me, because I have three little ones, three under the age of six. Daycares are closed until June 29th. So while health is strong, financially, we're doing all right, sanity is in short supply but we're making it work.

Adam Hooper (04:44):
That's a different podcast.

Troy Merkel (04:46):
Yeah, a different… Yeah, exactly.

Adam Hooper (04:48):
Yeah. We got the… Again, we're in Oregon. We had the school canceled through the end of the year a while back, and it seems like there might even be some uncertainty around fall. Especially with some of the colleges and other facilities more remote, we'll see. It'll be interesting to see what that looks like come fall semester time and where that goes.

Troy Merkel (05:12):
Oh, absolutely. I don't think the fall's a certainty, and even then, it's not going to be business as usual. They're distancing. How do you social distance at some of these schools with the classroom sizes and things like that? It's going to be fascinating to see. You look at what California, you got LA mayor there saying, they think through 2021, no major gathering. Well, what's a major gathering? A school assembly, or you mentioned college and universities where they have 300, 400 person lectures. How do you do that with social distancing? It's going to be… It's a new world. It will be very different.

Adam Hooper (05:45):
It is. Yeah. So one of the things we just recently had an episode, we talked to a couple folks about the 40 work-week and some of these, I guess, less work environments. Have you… you have almost a month into this now I suppose on your side. Any life hacks, any skills or techniques that you guys have uncovered and how to make sense of working remote, working at home with three kiddos and all the time in the world at home?

Troy Merkel (06:17):
Yeah. Work-life balance has become complete work-life integration. There is no separation between the two. So scheduling time, getting my kids out. I got the three boys, so I got to get them energy burned and everything. And then just delivery services. That will be the fascinating thing, especially we'll dive into retail later. I don't know if this genie is going to be able to be put back in the bottle. My wife is actually actively unloading our weekly grocery delivery right now. We actually got our alcohol delivered using the Drizly app last weekend, and Drizly reported I think one week, week over week, they had 1,000% growth in sales.

Adam Hooper (06:57):

Troy Merkel (06:57):
So we're getting everything at home. My wife jokes, she goes, "Do we even have to leave the house ever again?" And I said, "Well, I think we do for sanity and marriage sake." But yeah, we can get almost everything to us. So those deliveries have been huge. And then technology. My kids are playing games. They're using tablets for learning and everything. So it's different home life a little bit.

Adam Hooper (07:21):
Yeah. I think like you said, it'll be… We've talked about it in the last couple episodes is the thought experiment of what sticks. What are these changes that we're going through with this experiment right now that will remain? I think it's unknown yet what will stick. I think there will be some pretty big shifts as to how we conduct business, and how we hold ourselves out in public, how we social distance. Who knows if this is one of those permanent changes. It'll be really interesting to see how this all unfolds and where it goes. I hear you mentioned the alcohol sales [inaudible 00:07:57] this essential business thing.

Adam Hooper (07:58):
I know you guys, that's maybe my cheap segue into the piece of content you guys put out recently about the construction sector of different areas are having different opinions on what is essential. We were looking at a deal in Illinois development project. In Chicago, all construction activity is shut down. Different markets are taking different approaches to whether or not construction services are essential, which can have a pretty big impact on projects that were either developments or have you repositioning as rehabs. What have you guys seen, and maybe tell us a little bit about the landscape of what the construction market is going through right now with this COVID situation?

Troy Merkel (08:41):
Yeah. No, it can be really challenging. So you have some states or cities that have taken that stance; in Chicago, Boston. My hometown here, it was one of the first. They shut down construction for two weeks, all construction, not just commercial, but residential and everything. And then you have a number of States that have just wholesale shut it down; Michigan, New York, Pennsylvania, New Jersey. Construction's deemed non-essential. And then in other states, there's some restrictions on it.

Troy Merkel (09:09):
Multi-family or government projects, or critical utilities can continue in states like California, Massachusetts and Washington. But otherwise, it's limited. Some other parts of the country though, when you're going more in the Midwest, some of the south, there's really no restriction on the construction. So those projects are continuing, but it's definitely caused issues with time delays, trying to get projects done. There was a lot of building going on at this time. So it's really disruptive to the supply chain that was coming.

Adam Hooper (09:41):
And now that's just on the actual physical job site construction activities, right?

Troy Merkel (09:47):

Adam Hooper (09:47):
So further up the chain, what have you seen with architecture or engineering, permitting? Has anything slowed down? What's the status of those further up the chain components of a development project?

Troy Merkel (10:03):
Yeah, there's definitely been some slow down there on getting things done. It's just hard to move anything through some of the regulatory agencies that are necessary for permitting an architectural design plan approval. They're working in skeleton crews and trying to work remote. Some are doing better than others, but not all the local governments and regulatory boards are really were set up for their entire group to be working remote with regards to that. And then the other thing, if you want to fit it into… Some of them where they are allowed to work. So even in states that they aren't restricting the construction through government mandate, they're having problems with unions and workers not wanting to show up to work. And so that's really creating some headwinds too for the builders.

Adam Hooper (10:49):
And what do you think the longer term effect of that is going to be? We were in an environment where I think most real estate investors and developers were lamenting the cost and lack of availability of construction work and materials and supplies. Everything was just getting so bid. There was so much need for development services that the costs were just going up like crazy. Do you think this will have any impact on I guess either medium or long-term in terms of construction labor, the availability of labor? Where do you see this going on hard costs? Any thoughts there?

Troy Merkel (11:29):
Yeah. So construction has shed about 9% of its jobs over the last five-week period, so there's definitely been an easing into the labor market. That's ultimately going to translate likely into suppression of wage growth. So some of the skyrocketing wage costs we've seen especially at the subcontractor levels; the plumbers, the electricians, things like that that had grown at really astronomical rates should settle a bit and should make it a bit easier. That being said, the challenge is timing of everything.

Troy Merkel (12:03):
There's construction contracts. Big jobs they are working on today aren't getting done. That's pushing everything in the pipeline back three, four months. So it can be a challenge for those on the development side. I think for the current owners in some of the markets such as like New York where there was significant construction going on that's been halted, it gives them a little bit of a reprieve as far as supply coming into the market. Because there were some concerns in certain segments that we'd be getting oversupplied. So there's always a second side in any sort of economic transaction so that there are some positives to be gleaned out of it.

Adam Hooper (12:39):
And too early to tell what I guess the material in any material impact on… If you're listening to the show, if you're maybe looking at a development project or they're looking at investing in a development project, obviously case by case, location by location. But when do you think we'll start to get a picture of what that impact will be for the development landscape?

Troy Merkel (13:04):
Yeah, I think we're probably a month or two out to see where that ends up. We've had… The unemployment numbers have been hitting. That's been significant, but we still haven't seen the full impact there. We think that unemployment could be a little over 21% right now. Last construction unemployment was about 6.9% as of the end of March. We'll see what the April numbers come out with. I think ultimately, if you're an investor looking into a development project, you're looking at at least a three to six-month delay before you can start getting workers back up and running, especially if you're in some of these restricted markets.

Troy Merkel (13:41):
If you're in some of the South and the Midwest, you may be able to continue construction as usual. We do have a number of contractors that are just continuing to plow ahead, and that development is continuing to go. But when you look at where the significant amount of growth has been in California, in the San Francisco area, up in Seattle, [inaudible 00:13:59] and you go down in New York, that those areas are really going to be bogged down. We're at least three to six months delayed. We'll see it could go further than that.

Adam Hooper (14:11):
And you said that's a pretty well split beyond or between commercial and residential? Have you seen much of a delineation between the determination as to whether or not commercial or residential are essential one more than the other, or is it a blanket across both?

Troy Merkel (14:28):
So residential is definitely still outweighing the need and being considered essential by the local government. So residential's continuing full tilt. Multi-families continuing. I think even from an investor perspective, if you look at it where demographics go, we're still under-supplied on multi-family. Home builders have scaled way back on housing. If you're betting on this idea that everybody's going to work from home, I'll tell you what, not everybody wants to work from home from an 800 square foot apartment. So they're probably going to want a bigger space. So multi-family is definitely going to continue and be a little bit more of the darling. Office is really a mixed bag. There's headwinds and tailwinds on where the office sector is going.

Adam Hooper (15:10):
Yeah. I guess that's one of the things we've been trying to explore in these conversations is, how much of this is a fundamental shift to some of those supply demand imbalances that we were seeing before coming into this crisis? And will there be any resets to those? I think I generally would agree with you that multi-family entered into this crisis with such a supply demand imbalance. Obviously, we have far more renters than we have available supply constrained on being able to develop and deliver new affordable housing product, single family supply constrained. Do you see what we're going through now causing any fundamental changes to those supply demand dynamics in any of these asset classes?

Troy Merkel (15:55):
Yeah. So [inaudible 00:15:56] on residential for a moment, I think that there was a question coming into this year. We were really poised for a really strong housing market, and we were all of a sudden really going to find out, are millennials not buying because they don't want to or are they not buying because they can't? Because the parts of the economy that were driving them not, lack of wage growth, things like that, those were starting to resolve themselves. But now, this is now the second major financial shock to impact millennials in their early careers, in their adulthood. This might be the permanent one that finally knocks them completely into renting.

Troy Merkel (16:34):
So where we saw housing ownership tick up, that may no longer be there. So that's going to be interesting, to see if it's just now multi-families gets further gas on the fire there. The other one that's really going to be an interesting one to track is office space. I had written about this as we were coming through 2019. I was really starting to get concerned about office and that we were overbuilt in office. Vacancy rates were a great spot. So I looked a little crazy. We were at about nine to 10%. But we started digging into what's been driving office occupancy. You start to realize that the demographic growth within the office space was just too fast compared to the population growth.

Troy Merkel (17:18):
And what I mean by that is, there's about 2 to 2.3% population growth within office, whereas the US growth had only been about 0.7%. What was driving that outsized growth within the office space was the fact that boomers and millennials were working together at the same time. So you had the two largest generations living, working at the same time. While your median age boomer now is in their mid to late 60s, the millennials are all here. Your youngest millennial is mid 20s. The next generation in America, Gen Z, is about 25 million people less than the millennial generation. So I already saw concerns and cracks in the office market on a national scale. Some markets would, those driven by tech, healthcare, things like that, continue to expand. But I was very, very concerned. When you look at some cities like Chicago, even New York where the population growth had been going there.

Adam Hooper (18:15):
Yeah. And then, you had to… Again, like we were talking about a couple episodes ago, the shift, we're all working remote right now. Again, super fortunate that we're able to be employed, and we have the luxury of being able to work remote. But how much of this is the trigger that makes that more mainstream in industries that you would never think would have to figure out how to work remote? In our tech industry, I think there was a generally accepted thing from working from home and working in distributed offices, but these traditional industries that have never even… Didn't even know what Zoom was, to go to overnight entire industries and the entire country almost working remote. That's a pretty disruptive shift, and I think will be another push towards that curious look at what office does coming out of this.

Troy Merkel (19:11):
Yeah. No, that's totally true. There's the challenges that we've got going on with that. It will be interesting, because you look at a tenant like myself. So our firm, we're a public accounting firm. We have 12,000 employees. We're generally a great office tenant. We're the ideal office tenant. We have been condensing our office plan, but we still felt like, Oh, we need to be together. We need to be together. Well, we're now about six weeks into working remote, and there was concern that our junior staff would just fall by the wayside. Our productivity would plummet. Ultimately, it ended up… Our productivity is held pretty strong. We've continued to work, and we basically flipped the switch and moved everybody remote, everyone; every admin, everybody.

Troy Merkel (20:04):
I think it worked better than people expected. Now, on the flip side, we had been also densifying our space. Every lease that we had been signing over the last five, six years, we've been taking about 20% less space with about 15 to 20% more people. So we were really densifying our office space and having these workstations. Or what our interns really love where these big, high [inaudible 00:20:26] bar top tables where 10 or 12 of them would be on a table that's only maybe 20, 30 feet long, so really densely populated. Well, now you look at and see some of the things, like [CVREs 00:20:36] put out with having six foot circles around desks and things like that, the space requirements are going to drastically change.

Troy Merkel (20:46):
We talked earlier about what is going to be blasting versus what's going to be short-lived. When I think about this, people want to relate it to the Great Recession or the Great Depression. But I think from a psychological standpoint, which has a longer runway is more akin to 9/11 and how the country felt then about being under attack. Different circumstances clearly then, but this concern that your wellbeing and your health and your safety was under attack, not just your fiscal security and financial security. And so, we're still… You and I travel a lot. We're still in long TSA lines 20 years after the fact. There's still many measures of privacy and security that we've given up that maybe prior to 2001, we never would have considered. I think this impact, the psychological impact that COVID-19 is going to have on the US citizens, is going to be long lasting like that, and some of that's going to translate into how office space is used going forward.

Adam Hooper (21:45):
Yeah. And it's those second and third order things that we don't even have an idea to recognize today. Like you said, deliveries are one thing. When we get back to a retail environment, Higher education, just general education, some of those are the more apparent ways that this will have those impacts, and I think it'll be some time before we understand what the full impact is. Again, psychologically and just behavioral patterns that we see from this shaking out. So very, very interesting times for sure, and we'll see where that all continues.

Adam Hooper (22:23):
Another article that you wrote recently was around some of the stimulus packages or the Paycheck Protection Program, Main Street Lending Programs, some of the other things out there. We haven't talked about that on the show yet. Just the other day, we heard that there was [inaudible 00:22:39] of a second wave of funding for the Paycheck Protection Program, obviously that ran out very quick when the first wave went through. So maybe… I know it's a very complex… It should be simple. In reality, it's a fairly complex program. But why don't you maybe take a second to talk through that, and what impact, and where some of those funds went that we'll see from the Paycheck Protection Program?

Troy Merkel (23:05):
Yeah, sure. So the Paycheck Protection Program was really targeted towards smaller businesses, 500 or fewer employees. The intent of the program was to get money in there to pay for payroll. So the loan… It's a loan program with some forgiveness based off of certain stipulations on the backend of it. So it would be a two-year loan, and the balance alone would be based off of two months of payroll, two months average payroll. And so the intent was to get that out fast. It did get out pretty quick. There was about 349 billion in that first traunch. It moved in a couple of weeks. Ultimately, it did benefit quite a bit the construction and real estate segments. Construction actually accounted for the largest percentage, 13% of all the loans that were doled out. Real estate also received about 3%, but they received about 10 billion in funding. So a lot of funding did go out pretty quick, and it did help the industry.

Adam Hooper (24:06):
Again, the first wave, that was soaked up really quickly.

Troy Merkel (24:10):
Mm-hmm (affirmative), yeah.

Adam Hooper (24:11):
I don't know if it was anticipated, how quickly that was soaked up. With real estate, I guess construction, like you said, got a pretty big portion of that. Real estate didn't get as much. As we were talking before we started recording, a lot of times how real estate investments are structured at the entity level, that business might not actually employ anybody. So an entity that owns an asset might not be eligible for it. It would have to be the operating company on top of that or the management company on top of that. Where within the real estate space or within the investment space, for our listeners, did any of those funds go to places that would have an impact or benefit to their investments, or how did you see that in the actual investment side of the real estate space?

Troy Merkel (24:59):
Yeah, you're right. It's really challenging, because the way that it is structured, you don't really have employees yet. 1099s don't count contractors, don't really count towards that payroll determination. So it was geared more towards the management company, more toward the actual employees of the investment companies. Well, we saw a lot of our clients doing or asking us to help them do is help their tenants help themselves, especially the commercial and the retail tenants and things like that, help them get the loans. Help them, because 25% of the loan proceeds they get can be allocated towards rent and rental payments, and they can still qualify for the forgiveness.

Troy Merkel (25:40):
I guess just touching upon the forgiveness for a moment there to clarify that for everybody. If you spend 75% of your proceeds on payroll for the eight weeks following the time that you get the loan and 25% on rent and utilities, it will all be forgiven. So that's a huge piece of the loan and something that people are really following and tracking closely. So educating the tenants was a big piece of it. Helping with the actual business side and servicing side, if you have a development arm or a brokerage arm and things like that, that potentially could apply for it. But you're right, from the actual real estate itself, it's very challenging for real estate investment to qualify.

Adam Hooper (26:24):
Yeah. Actually, one of the managers that we've worked with, he's a pretty entrepreneurial guy. He actually spun up a whole portal himself just for his tenants to be able to help them facilitate filling out the documents, collecting everything, doing the calculations. He was able to build a couple of relationships with banks that he has accounts with and relationships with to streamline those applications. So I thought that was pretty interesting to see an owner of these assets that they can get their own loan program, but to be able to spin up something that quickly to be able to help get their tenants and their users of the space through that process. I thought that was a pretty cool project that he took on. The question I think is the use of those funds two and a half months of payroll was the size of the loan.

Adam Hooper (27:16):
Was that enough? I think was a question a lot of people are asking with how fast that first wave went. Again, we're recording this on the 24th of April. Just have this new round come through of approval for I think another 250 billion roughly to replenish that program. I'm assuming that will go pretty quick. I think the SBA said they have a million loans backed up in process ready to push through. I think that begs the question, is that enough? What is the impact that was intended with this, and do we think that will be enough to be able to save a lot of those businesses that might be at the threat of going out from the shutdown in this crisis? Have you guys done any research or track anything, or just your thoughts generally on whether this will be enough of an impact?

Troy Merkel (28:01):
Yeah. I think the first thing that you touched upon, the number of loans the SBA has, they've processed over a million loans, but they have hundreds of thousands in backlog. And so the first thing is that that is… I think it's about 310 billion for that second traunch is going to be. That's probably sucked up by backlog right now at the SBA. We're still encouraging clients to submit their paperwork, try to get it. There's no harm in trying. It helps. It will help the clients. But to your point, it is not enough. It won't be enough. When you're looking at… We started off the conversation, we were both looking at, at least through June in our respective states before kids start going back to school.

Troy Merkel (28:49):
That means in earnest, it's going to be difficult to get people back at work. Even when you're going to get back to work, you look at what some of the occupancy restrictions have been at grocery stores, and you start playing that out. If it's at 40% occupancy restriction, how are retail segments going to open up and be profitable enough to pay rent to maintain their employee head count at 20 to 40%.? Going lower, when it's more intimate type businesses such as barber shops and nail salons where there has to be a physical contact with the customer in order to provide their services, it's going to be very challenging.

Troy Merkel (29:28):
So, no, I don't think the two months is going to be enough. You're going to see businesses fail. There's going to be a number of businesses that are going to fail across the country. Those big titans are doing well. You look at Target and Amazon. You look at the digital streaming services like Zoom and Netflix. They're crushing it, and that's going to continue. And so you're going to see a consolidation of market share to some of those bigger shops. Good news for industrial and things like that, really bad news for retail. Certain out-market, suburban sites and things like that could become challenging.

Adam Hooper (30:10):
Yeah. Well, I definitely want to save some time at the end here to talk through sector by sector. But staying on this for a bit, we've seen different responses from managers in terms of how they're reacting to this. We talked in the last episode with David at George Smith Partners about how the forbearance process works and what goes there. What are you seeing in terms of the real estate management companies or sponsors? How are they shoring up their balance sheets? Are they doing capital calls? Are they looking primarily at forbearance? Are they working out rental plans with their tenants? What are you seeing out there to strengthen the balance sheet from a sponsor's perspective to get through these times?

Troy Merkel (30:55):
You're seeing a little bit of all of them. First of all, the number one thing we told all our clients, draw any line of credit you have right now and see if you can bump any of them up. Some of the multi-family, some of the commercials that were strong tenancy had good records, they were actually able to even increase some of their lines of credit and get money out, but immediately do that. That's not too late now. If you're listening now, you can still reach out, try to get that going. One of the things that's been not hidden, but… The politicians get a lot of press, but the fed has really provided a lot of liquidity into the market.

Troy Merkel (31:30):
They got a big push from private equity and real estate to buy up some of the bond financing and things like that and to make sure they stabilize the lending platforms there. So there is lending still available. So that's been critical. On the other side, from the capital standpoint, there was a peak of dry powder in the market, so the highest ever recorded prior to this drop. That dry powder hasn't gone anywhere. So there's a lot of capitalization sitting in the fund level, maintaining that capital, and actually, some of the cases looking to shop for bargains. I know Blackstone talked today about, they have 21 billion in capital that they're looking to deploy in US real estate.

Troy Merkel (32:12):
They think it's a good time, because their opportunity fund, they're devaluing at about 9.8%. So they say, well, that must mean it's time to buy in other parts of the market. So there are people that are looking to do that. Now, if you also continue down the liquidity part with workouts with tenants, they're being proactive. Well, you just talked about with that manager really setting up a portal to help out their tenants to get these loan programs, that's phenomenal. That is one thing… When we go through crisis, it's always reassuring sometimes to see the positive sides of humanity. It's things like that that will endear yourself to that tenant and will allow you to work through the program, because a lot of it is coming together and working through it, being open and honest about where the situation is and trying to come to a resolution.

Troy Merkel (33:03):
So we're seeing up and down the spectrum. But shockingly at the residential level, almost 90% of the rents got collected by April 20th. That was higher than people expected. I think it was more because of sentiment. People were worried there. We'll see how May comes. May could be bad, although I'm optimistic. When you look at the $600 of extra, sorry, extra unemployment seems to be coming through to most people. The $1,200 stimulus check hit a lot of banks this month. When you look at costs and things like that, people might have the cashflow to pay their rent, and that's one of the things past health, food. Shelter is likely what they're going to pay for. So that rent should be continuous. And then, sorry, I've been going long here. But the last one I want to touch upon is the loan side of it.

Troy Merkel (33:56):
The FDIC and some of the interagency guidance basically allowed for, you can extend any payment deferral for six months, repay it over 36 months, isn't going to be considered troubled debt restructuring in particular on the multi-side. Many of the banks we've talked to and we're aware of are providing forbearance agreements and providing leniency to the real estate companies, and where they're deferring payments or making them interest only payments with a payback of anywhere from 12 to 36 months to make them whole. Some are just restructuring and tacking it on the back end. So there's a lot of really good communication and good partnerships across, up and down the chain with regards to. That's what where we're seeing for the most part, and that's been good to see.

Adam Hooper (34:49):
Yeah, that is definitely good to hear. I think now is the time that we all need to come together, because we're all in it together, coming up with those creative solutions and really trying to help make sure that we can all get through this. One way or the other, that's definitely what's needed right now. So that's good to hear, people getting creative all up and down the side, the stack of it. You wrote a little bit about the Main Street Lending Program. We haven't heard that talked about too much yet. I don't know if it's just slipped under the radar or if it's going to be a pretty smaller, I guess, less applicable program for a lot of the businesses out there. But maybe just a second on the Main Street Lending Program.

Troy Merkel (35:31):
Yeah, sure. So the Main Street Lending Program is supposed to be that mid-tier lending program. There's been some big bailouts for some of the big companies. The payroll loan's really driven at the smaller company, so 500. So Main Street Lending Program, you get up to one to $25 million loan. It is for companies that have less than 2.5 billion in revenue and less than 10,000 employees. There is some considered leniency here from the real estate standpoint in that, it's not as clear that the payroll is how it's completely determined. That being said, there's no forgiveness for those loans.

Troy Merkel (36:12):
It's four-year loan. It's lending at somewhere between 250 to 400% about basis points, above the SOFR rate. So that would put you at a minimum of 2.51% up to 4% lending rate. So there's some element there. We have a number of construction and real estate companies that are borrowing in the threes, so depending on where that program goes. But yeah, the Main Street Lending Program could be really vital to a lot more of the operating companies. I think real estate companies, again, the [inaudible 00:36:49] are going to have a trouble really taking advantage of it.

Adam Hooper (36:52):
Yeah. Any scuttlebutt or words or anything that you guys are hearing on what's to come in terms of stimulus packages or anything that we might see in the future from these rescue packages?

Troy Merkel (37:09):
Yeah, unfortunately, one of the things that we're hearing is that it won't be good news is that some of these non-banking lending programs that have been asking for bailouts, the rocket mortgages, some of the PE shops that have moved into lending and commercial lending programs, the treasury secretary mentioned that, he said, they're not going to get bailout right now. So that is troubling. I think the shadow debt market has grown substantially over the last 10 years. As some people have looked at the equity's being too high, they've looked at moving into the mortgage market, and there's been opportunities there in shadow lending, and they're not going to get a bailout. So that's a concern. I wish I could tell you there was good news, but that's something that we're seeing, that we were hoping might get some relief, but it doesn't look like it's going to come. So some trouble's there.

Adam Hooper (38:04):
Okay. Well, that wasn't what I was asking for.

Troy Merkel (38:07):
I know. I wish I had [crosstalk 00:38:08].

Adam Hooper (38:09):
Is there any good news, Troy? Do you have any good news, anything? [inaudible 00:38:13], obviously day-by-day and who knows what will come next, but it seems to be some unifying push that there needs to be more. The speed that this capital went through the market, I don't know if anybody expected it to be soaked up as quickly as it did, which would indicate that there's clearly a need for a lot more. But then I think you run into the question of, how much can the government actually support? What is the long-term effect of pumping trillions of dollars in these programs on a longer-term basis? What kind of effect does that have? So it'll be, again, unknown and certainly interesting to watch what the trade off of short term versus longterm there, right?

Troy Merkel (39:01):
Yeah. You look at the sources of capital in this country. And so, when you look at large scale sources of capital you would need for this type of stimulus, you have the fed. The fed has been buying. They're continuing to buy bonds and mortgages. So that is good news. They're continuing to do that. That doesn't get as many headlines right now as these lending programs, but that's continuing. The stimulus checks, or the stimulus is coming out of the Congress. One really actually good thing for real estate that I did fail to mention is that, some of the things they're talking about with infrastructure, potential infrastructure spending, that could be really beneficial.

Troy Merkel (39:41):
Back under the Obama administration, they passed the FAST Act, which was construction for infrastructure, building of not only roads and things like that, but airports and train stations and things like that that helped facilitate real estate development and growth. That program infused a lot of money into the markets to do those types of deals. This new program they're talking about would infuse that amount, plus another 10 billion per year for the next 10 years. So that would be really powerful if that came out. The other one that… This one, I've heard rumblings, and it's one of our near and dear topics is potentially taking another look at Opportunities Zones. That's a way to free up private equity capital.

Troy Merkel (40:24):
They have provided some extension pieces to it to help make it a little bit easier to do. But you could take it, and if you pivoted the program. The whole point of it was to stimulate economic growth and drive capital in. If you remove some of the restrictions of having to improve or reinvest into the business or make some big improvement development, shorten the life to seven years and then have maybe the benefit at the end, so we're trying to make it all work together, that could be a really powerful program to tap into the third leg. After we have the fed, we have Congress putting out money.

Troy Merkel (41:02):
Potentially, we can get the private markets to start to get stimulated in there. There has been some things that have been considered. I've heard of things that have been put in and pulled out of the bill related to loosening some of the restrictions on the Opportunity Zone program. So we'll see if that comes out. Right now, it's all conjecture and what's going on in closed doors down in Congress, down in DC. So we'll see. I hope that something comes out, because they can free up the private equity market to try to help.

Adam Hooper (41:29):
Yeah, we'll have to definitely keep us posted. If you hear anything more, we'll harangue you to come back on the show and give us the update for sure. Let's switch gears a little bit, get your crystal ball out. What is needed to get some footing on stabilization or recovery here, do you think?

Troy Merkel (41:53):
Testing's number one. Testing's probably one, two, and three. We just have to get a better sense of the known. Where is this impacting? Who is it impacting? What is the actual mortality rate? Luckily, we're seeing that the hostel occupancy is stabilizing. What was going on in New York where there was concerns that we're just going to completely run out of beds, it looks like we've petered off on that, so that's good.

Troy Merkel (42:22):
And then vaccine is the silver bullet, but we're still, no matter how fast they go, probably 12 to 18 months out from getting that rolled out, getting enough people vaccinated to really make that work. So there's going to have to be treatment and some treatment to it, and that'll have to come hopefully in the next few months. So that's the number one thing. And until that really happens and we learn how we operate, then what are the new rules of, how do we social distance? What does things look like? What does the occupancy look like at [inaudible 00:42:56]? That's what it's going to take before we start recovering.

Adam Hooper (43:01):
Yeah. I think it'll be interesting to see too the consistency of the eventual reopening. How does that look across states, industries, product types, experiences? How standardized can that be? Barry [Sternlicht 00:43:18] was talking on a webinar yesterday or day before, talking about the hospitality industry of the more efficiently that that industry can standardize these procedures and these sanitation policies and sterilization procedures, the quicker that confidence can come back that when you go to travel, you're in a space that you feel more comfortable with. You know that these protocols are being followed.

Adam Hooper (43:43):
So I think it'll be interesting to see again what kind of collaboration or cooperation in some of these different industries that might've been competitors historically, but how can they collectively standardize some of these procedures to open back up and start building that confidence in these different pieces that we've taken for granted forever. That'll be I think another component of how quickly or how broadly we can start to open some of these things back up is, how well is everybody communicating these best practices together?

Troy Merkel (44:17):

Adam Hooper (44:18):
Any thoughts on… We kind of touched on some of the asset classes. Any interesting opportunities you think will be coming out of this once we see that recovery? Anything that listeners should be maybe keeping an eye on that maybe isn't immediately apparent when we start turning the corner here?

Troy Merkel (44:37):
Well, I don't know if I would say this is an immediately apparent, but industrial distribution, the last mile delivery, that genie's out of the bottle. It's not likely not going to go back. We see what even happened in China, even as they started opening back up, people continued to do online shopping for groceries and staples and things like that. One silver lining actually has been on the retail side shockingly, is that clothing and some of those other luxury items and things like that have not really sold online at the rate that we expected. The sales have really dropped off.

Troy Merkel (45:19):
Some early survey data indicated that 77% of people would prefer to be shopping in stores for their clothing, and the numbers back that up based off of what they're buying. So you could see a makeup of where these clothing and that luxury side might be the new anchor. Things like supermarkets that have been really strong, they might have smaller footprints and have more food distribution channels and things like that. So that could be a play in the retail side that could be interesting. They had been pushing for experiential retail to have people get in there and come shop. How does that play out in social distancing? Who wants to go into an escape room right now when you can't get out of your own house?

Troy Merkel (46:03):
So those would be some interesting plays. And then I still think the multi-family, I really think this is going to be the death nail to home ownership for the millennials, and I don't know where Gen Z is going to come. They're going to want bigger multi-family spaces. And so some of the stuff that's been being built right now might be too small for them. The single family rental is going to be huge, because they're still going to want to have kids. They're probably going to want some of their social distancing. Those assets are… They were hot before. There's questions of, had they done too hot and are they going to tail off? I think this just put more fuel to the fire and gave them another 10 year, 15-year runway.

Adam Hooper (46:40):
Yeah, I think that seems pretty consistent. Especially, I don't know if you've seen much of the single family for rent communities. Have you seen? We've seen a couple developers that are working on those projects. Rather than building a town homes or multi-family, they're buying much, much larger tracks of land and building just an entire community of single family for rent, which was an interesting strategy. I don't know if you've seen much of that?

Troy Merkel (47:05):
I have seen that. It's fascinating when you look at that rental market. I think those renters, they stay twice as long. They are more timely on their rent payments. They take better care of the property. The cost piece to it has come down significantly, and they've also been leveraging smart home tech and proptech things to do sensors in each in the houses to track things for repairs on water and other items and HVAC and tracking that. And so, it's made it actually economical to manage that.

Troy Merkel (47:46):
Because the big challenge for a number of years prior to these technology evolutions and some of the building supply, the actual building materials have gotten better over time, and they last a little bit longer and things like that. One of the reasons you never really did this as a renter or as a landlord is that the cost to maintain all of those properties was just astronomical, and they were really challenging. But that's really been driven down. You've seen some of the bigger shops come in and do that, and it's gone really well for them. And so I think that single family rental, that's going to be a huge space.

Adam Hooper (48:18):
Yeah. Perfect. Well, there's some nuggets for listeners out there. As we wrap up, we'll let you go enjoy your Friday night here. Anything that listeners should be paying attention to or watching, or maybe different metrics that you're watching now than you were before this COVID crisis?

Troy Merkel (48:39):
One metric you're watching is obviously the cases and things like that. I don't know if it's a metric I wasn't watching before. But the one that you've got to watch and we got to be cautious about and think about, I do think that we're going to recover, but that recovery is going to look a lot like a Nike swoosh. I have to caution people that unemployment right now is probably at about 21%. To put that into perspective, in 2009, the highest unemployment was about 9.9%. Back in the '80s, unemployment was about 10%. This is double. The idea that we're going to get back down to single digits before the end of the year is highly unlikely. So it's going to be a longer recovery. Ultimately, real estate is driven… Employment is one of the main drivers of real estate, whether it's residential, office, consumer sentiment for going out and buying at retail.

Troy Merkel (49:28):
That's going to be a key driver. So continuing to track that. That's a number that everybody looks at, but I don't think they always have it in perspective where we're at right now. That being said, the fundamentals are still there. This wasn't an issue with the actual economy. This wasn't an issue with the financial market. This is an externality. It's a true black swan event that likely the US will be one of the strongest to recover from. We'll see what happens in the [inaudible 00:50:00], but that's going to do well for US real estate. That's going to be a good thing coming out of this. It's not the same as 2009 where it's going to take years for US real estate or the financial markets to turn around. The government [inaudible 00:50:14] some of their lessons. But the amount of stimulus that has been shot into the economy to stave off-

Adam Hooper (50:19):
Yeah, it's big.

Troy Merkel (50:19):
… this has been phenomenal. Some of the roll back the regulations that I don't know that they're going to go back, so that's going to help. So I think the bounce back, and we will outpace many of the other economies of the world. But it's not going to… The unemployment's going to take a while to get back down. Until we start getting back down in the single digits, we won't see the growth trends that we saw over the last 10 years.

Adam Hooper (50:42):
Okay. Well, we'll put links in the show notes here, Troy, for those two articles you wrote that we mentioned. For listeners out there, what's the best way for them to keep up to speed with what you've got going on with RSM?

Troy Merkel (50:53):
Absolutely. So you can follow me on LinkedIn or on Twitter. My Twitter handle is real easy @TroyMerkel. And then also the Real Economy Blog. You can Google it. We're the top hit there, myself and a bunch of my colleagues writing about all the various industries. I'm focused obviously on real estate with my group there, but we touch upon all the industries and what's really happening in the real economy. Those are your mid-sized businesses, mid-sized markets that are often your tenants and yourselves.

Adam Hooper (51:21):
Perfect. Well, Troy, we'll wrap it up there. We really appreciate your coming on, spending some time with us this evening to try to help us make some sense of what's going on in the world right now. So really appreciate you coming back on the show.

Troy Merkel (51:32):
Thanks for having me.

Adam Hooper (51:34):
Perfect. Well, listeners, that's all we've got for today. As always, if you have questions or comments, please send us a note to podcast at And with that, we'll catch you on the next one.

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