Ask Robert Ray how Nevada’s title industry from a commercial real estate perspective is doing amid the coronavirus pandemic, and you’ll get a mixed response.
In the title business for 25 years, and senior vice president, manager of Fidelity National Title Group in Las Vegas, Ray is anxious to see how the industry recovers as businesses begin to reopen and employees begin returning to their offices.
“Residential operations are faring much better than commercial,” Ray said. “The industry is more robust because of refinancing activity and low [interest] rates. There’s also good momentum on the resale side.”
Switching gears to commercial real estate, Ray said, investors, in general, are on the sidelines as they to figure out what’s next. “That is directly impacting the title industry,” he said.
Commercial real estate sales haven’t completely stalled amid increasing job losses attributed to the coronavirus outbreak, but the normally busy spring selling period has slowed with more deals falling through for now.
Ray said for commercial real estate the outbreak was a “nasty blip on the screen.” He described the first quarter of the year as “our best quarter in probably a decade.”
“We’ve seen a pretty heavy uptick in [deal] cancellations,” Ray said. “We are also seeing a lot of extensions in due diligence, with some buyers asking for 60 to 90 days of due diligence before moving forward with a deal.”
Despite sales and short-term projects being deferred, projects continue to be built in southern Nevada, with more than 800,000 square feet of office, for example, in the commercial real estate pipeline. Those deals are being built for companies who are looking for inventory after the coronavirus outbreak.
Most real estate analysts expect a robust backlog of commercial properties on the market.
The second quarter of the 2020 has been relatively quiet for commercial real estate. Among the larger deals included Brookfield Properties selling six industrial buildings totaling 425,700 square feet within the 3.3 million-square-foot Hughes Airport Center, about three miles south of McCarran International Airport. Western Devon sold an 83,125-squarefoot facility for $12.1 million to Clarion Partners, and BKM Capital Partners sold a 17,047-square-foot building for $16 million to a private investor.
“Commercial sales have kind of ground to a halt,” said Shosana Carro, a manager with Old Republic Title. “We still have loans being approved … but a lot of underwriting is a little harder to clear in the situation we are in right now.”
Overall, Carro said, commercial real estate has held its value.
Any discussion regarding title insurance requires the understanding that it is insurance. It does not fix problems, it underwrites risks.
Title insurance was originally developed in the United States as a result of a deficiency of land records laws. It is intended to protect an owner’s or lender’s financial interest in the property against loss due to title defects, liens or other issues.
The policy will defend against a lawsuit advanced against the title as it is insured or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy, Carro said.
The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853.
Commercial real estate title insurance covers apartments, and office buildings, retail development and industrial facilities. Which means as the commercial real estate market begins its post-coronavirus recovery so will demand for title insurance.
“I don’t believe the recovery will be a V or U curve,” Ray said. “The recovery will take a little longer in communities that are more diversified.”
There are two types of commercial title insurance policies – owner and loan. Loan title insurance policies are designed to protect the investment of the bank or other lender should any problem with the title surface at a later date. An owner’s title insurance policy protects the buyer or owner of the property should title issues arise.
Because commercial real estate deals typically involve millions of dollars, complex transactions and complicated title histories, title insurance plays a vital role.
It not only protects against title defects, but also typically covers issues such as boundary mistakes, zoning conflicts and environmental concerns.
1031 Exchange Transactions
One transaction that remains in demand in the commercial real estate title industry involves 1031 exchanges. A 1031 exchange is the swap of one business investment for another.
Named for the Internal Revenue Service (IRS) Code Section, the transaction permits taxpayers to defer recognizing gain on certain property provided that the “real property is exchanged solely for real property of like kind which is held for productive use in a trade or business or for investment.”
Although taxpayer must adhere to a number of details to defer any gains, the overall structure of these deals includes the following steps: taxpayers sell real estate with the proceeds being placed directly into an escrow account held by a qualified intermediary; and the proceeds of the initial sale are used to purchase a replacement property of like kind.
Taxpayers must identify the replacement property within 45 days of the initial sale and close on the replacement property no later than 180 days from the initial sale.
Due to the coronavirus, the IRS has extended deadlines for 1031 exchanges. Ray said the deadline has been extended 60 to 90 days.
“We are still seeing those deals happen,” said Ray, adding that the extra time is allowing some deal to get pushed through.
“The deals we see are for well-located properties, though it is at a much slower level,” Ray added. “We are also seeing loan modifications.”
Nevada’s economy has taken a big hit since the coronavirus pandemic arrive in March, but Ray predicts commercial real estate sales may pick up a bit in July as some deals have been pushed.
The unemployment rate has skyrocketed in the state, and a vaccine is still months away. As Nevada continues rolling back its stay-at-home order and more businesses reopen, forecasters believe the recovery will be gradual.
Nevada, however, is not headed for another Great Recession.
“It is going to take a while for Las Vegas to recover,” Ray said. “Things will pick up in the third or fourth quarter. It is certainly a challenge in terms of transaction volume.”
Ray stressed that Nevada’s real estate market is healthier this time around.
“It took us a good 5 to 6 years before we started coming out of the recession,” said Ray, adding that this time around there is less leverage and less speculative building.
“We are operating an industry much smarter than we did in the 2008 financial crisis,” Ray added.
Even as demand for industrial properties rebounds, the effects on retail and office are expected to last longer, as restaurants close, retailers file for bankruptcy and companies that occupy office state rethink their workplace strategies.
“It will change, especially office demand, and the way retail is (structured) as online orders such as door dash and post mates have become a popular alternative during the outbreak,” Ray said, “We will become more (outgoing) when we get a vaccine.”
As restaurants reopen with social distancing protocols, Ray said at 25 percent or 50 percent capacity a lot of restaurants can operate profitably. He didn’t expect those percentages to increase “until this scare is over.”
“There’s no market like ours,” Ray said.
Carro agreed, saying the market will stabilize and should recover within 12 to 18 months. She added that once Nevada completely opens up for business “investors will jump back in.”
“We are not in 2008,” Carro said. “We are still here. We are surviving.”