The real estate market is typically much slower to react than the stock market, and more importantly, real estate investors tend to hold for the longer term. They aren’t blind to what is going on right now, but most will take a longer term view and will be reluctant to completely pivot based on shorter term turbulence. Landlords and tenants in our market have been very quick to adjust to the new market conditions.

Downtown real estate has long been desirable and will likely remain more desirable than non-downtown commercial property.  But it’s all relative – those properties are not making a lot of income right now, so rents and sales prices will reflect that to an extent.  Both locations are expected to be resilient post-COVID-19. 

It is worth remembering that seen through a commercial real estate lens, Asheville still has a lot of strategic advantages for investors and businesses – especially in terms of its access to I-40 and I-26, climate security and predicted population growth. Regional tourism is also expected to pick up as a direct result of flying and international travel being restricted and perceived as less safe. Asheville is well positioned to take advantage of that trend. 

Therefore, on a longer term view we are still a good bet for an investor. Will they need to adjust their expectations of what constitutes a “good return” in 2020 and 2021? Certainly.   

We don’t like to generalize but it seems that most landlords are willing to work with their tenants to make it through the current situation. From what we have seen, most landlords worked with their tenants to reduce or defer rents in April and May 2020, but are struggling to work out concessions for June and beyond. The risk sharing really depends on the financial situation of the landlord.  

No sensible landlord wants to have an empty building, so they will usually try to work with their existing tenant.  The trouble comes when landlords have bills to pay (e.g. a mortgage, property tax). The tenant’s fate will be wrapped up in how willing the landlord’s lender is to work to keep everything afloat.  

We haven’t had enough lease or sale closings recently in our market to definitively point to a percentage rent reduction that’s standard. A lot of it will be location specific too. We do know landlords are nervous and looking at ways to attract new tenants, including rent drops in the first year of the lease to allow tenants to get a strong start, rent-free periods, and help with up-fitting costs. 

We expect downtown rents to drop a little. We’ve seen some with up to a 20% reduction on what they would have leased at pre-COVID, but those lower rents are largely only through the end of 2020.  They bounce back up in January 2021 to a more pre-COVID level.

We suspect so. The standard in our market has been three and five year lease terms with options to renew. In these circumstances, if a property becomes vacant it makes sense to do a shorter term lease with a new tenant and perhaps at a lower rent. Then both sides can review the lease after a year. That way, the tenant gets a feel for the space and their longer term prospects and the landlord feels like they have an option to move on or move rent up if the local economy has bounced back.

This is a really difficult scenario and you are not the only one facing it.

If your relationship with the landlord is good or was generally positive pre-COVID-19, then start with them.  Be honest and clear about where the business is financially, what stimulus you have sought, and what re-opening looks like for you. The landlord may well be pro-active and propose a compromise. 

If the landlord is not forthcoming, or the conversation isn’t going anywhere, I suggest getting all the stakeholders in the same (virtual) room to come up with a plan. If you can, try to get the landlord, all your business partners, your lender and if appropriate, a representative from the landlord’s lender involved. Get all the cards on the table, make sure everyone understands what operating with COVID-19 restrictions means for the recovery of your business. A commercial real estate broker or attorney can help act as a mediator too. Mountain Biz Works can help with some business counselling for example.  

In the end, if it is going to get contentious get an attorney sooner rather than later. You will likely have a security deposit at risk and a personal guarantee that was signed when you took the lease. 

Any settlement you come to with your landlord about exiting needs to be in writing so there is no onward confusion.  

The honest answer is, we don’t know, and anyone who says they know is guessing! 

A few spaces that came vacant in recent weeks in the downtown area have already been re-leased to new tenants. We had a lot of pent up demand for space in downtown Asheville and that interest has not all gone away.  It looks like office down-sizing is on the horizon as companies get used to remote working. We therefore expect to see a much higher percentage of office space being vacant compared to retail/restaurant space.

You are very astute to spot that this might be an opportunity for chain stores to get a foothold in the downtown area.  We’ve wondered the same thing ourselves.

The reality is, the City of Asheville cannot prohibit a particular tenant/brand or individual because they are part of a larger organization. All city staff and council can do is use zoning restrictions to limit the type of use a property can be put to, or how it is designed (e.g. how tall building can be or how far it should be set back off the sidewalk). 

A lot of downtown Asheville is zoned in a way that permits a wide range of retail, office, restaurant and bar use.  If a big chain fits into those categories of business, there is nothing local or state regulators can do to prevent them moving in, so long as they comply with current zoning laws and building code.

Our friend, Brian Turner (commercial broker with NAI Beverly Hanks), was kind enough to address this question:  

“The $5M represents almost all of the un-allocated balance in the TPDF (Tourism Product Development Fund) so they would not have access to additional funds to expand the program. The $5M will most likely be the limit of the program unless they find a way to reallocate previously committed dollars in a way that doesn’t violate any of the agreements they’ve made with those dollars.

The question usually then comes up regarding the use of the $17+/- million in the marketing budget but there are some constitutional issues that come into play. Specifically Article V, Section 5 of the Constitution that says, in  brief, that a tax collected for a purpose must be used for that purpose. So a tax collected to be used for marketing dollars could not be repurposed, whereas taxes collected to support “heads-in-beds” projects could be used to create a program that funds support of the tourist based businesses.”

Ultimately, the $5 million fund is very much welcomed by heavily impacted business owners but it doesn’t look like that fund is a silver bullet that will keep downtown businesses from struggling through social distancing and limited occupancy rates.

To put the $5 million in some context, in 2017 (latest figure available from Buncombe County Tourism Development Authority) there was $544 million of tourist spending on food and beverage consumption in Buncombe County. That’s a little over $45 million per month. We have already lost two months of spending due to COVID, equating to approximately $90 million. That puts the $5 million in aid into stark perspective.  

Based on initial indications of demand, the $5 million will get used up pretty fast or the sums granted to each individual business will need to be very small in order to help the maximum number of businesses to re-open. 

There are tough decisions to be made in relation to the allocation of those funds. For example, if a business was not doing well pre-COVID, or a Tourism Jobs Recovery Fund grant won’t be enough to save the business, should any aid be granted? We don’t envy anyone having to make that kind of call.