By Andrew McIntyre

Law360 (June 1, 2020, 3:10 PM EDT ) In this edition of Coronavirus Q&A, two of Goulston & Storrs' real estate leaders discuss the challenges of reopening in Boston and beyond, and note that trouble could be looming later this year for the multifamily sector.

Zev Gewurz and Jared Tardy, who co-chair Goulston & Storrs PC's real estate practice group, work in the firm's Boston office. They both have broad experience with purchase and sale, financing and joint venture matters, and Gewurz also specializes in commercial mortgage-backed securities deals.

They shared their views as part of a series of interviews Law360 is doing with attorneys that examines the ways the COVID-19 pandemic is impacting businesses and creating new legal questions.

This interview has been edited for length and clarity.

Where would you say we are right now in the COVID-19 pandemic real estate cycle, if I can call it that? What's your analysis of where we've come from and where we are now?

Tardy: I think we're in an interesting time period right now. I think when the stay-at-home orders started to be implemented in March, we shifted quickly from the deal pipeline — a heavy transactional practice — and we blended in advice to clients on all things COVID, be it landlord-tenant rent deferral discussions or lender-borrower type modifications or deferral discussions. So that was a big focus for a number of weeks, as well as kind of an added pressure to the deal pipeline and the transactions that were midstream when this pandemic really started to impact the U.S. So certainly greater urgency on all those deals that were midstream and advising clients on how to either close those deals or not close those deals, depending on where they were in the process. I think that the transaction volume has certainly slowed, and as deals close or die in this environment, there's not the volume to backfill. At this point, I think there's still in many sectors kind of a wait-and-see a bit longer [attitude], to see how deals are going to be done in this new normal, and really how to underwrite these deals. So I think we're at that point right now, where folks are trying to figure out how to transact in this emerging new normal.

Zev, what's your view on the real estate transactional market right now? What sorts of deals are getting done and what sorts of deals are tough to do?

Gewurz: I would say all deals are tough to do, but some deals are getting done. So, as Jared said, when COVID hit and quarantine started, many deals either died or were paused. And many of those deals are still in a state of pause or extended analysis. Some of those deals proceeded and closed. And then, interestingly, there were some deals that were struck after COVID started and that have signed up. I think, needless to say, the deals that were the healthiest were in multifamily. Both in terms of deals that stayed live — some, and not all, with some adjustments on pricing — and new deals that came. And not may, but some that came in after COVID. As Jared said, for the most part, I think people were figuring out where to put their computer and how to use Zoom for the first number of weeks. And then how to stay safe and figure out what this might look like. And what we're starting to hear from our clients now a lot is kick the tires. People are now comfortable in their home office, settled in their new normal for now, and are reemerging and trying to figure out, as Jared said, where the pricing is, where the market is and where the opportunities might be.

What's your sense of the capital markets right now and access to financing?

Gewurz: I have a thought on that, actually. Like many things, it's two ways. What we've heard is that lenders are cautious and they've tightened their requirements so that capital is available, but at a price, on the one hand. On the other hand, we've also heard that capital has dried up and that the stores are closed. I had both of those experiences [recently]. We are working on a development deal that is long-term, and development deals have generally been one of the types, depending on which asset class — sort of large mixed-use development deals are at least ongoing to the extent that they can be, and to the extent people can work on them remotely. And we had a very large construction loan for which we actually negotiated, completed and signed up a commitment. We celebrated for a moment, saying that we were the only large development construction loan that got signed up in the COVID era. And then it was pulled because somebody decided that under any circumstances, it's not a time for lending. On the other hand, we're working on a large securitized deal in the ... single-family [rental] sector which was pulled right as COVID started, and we got a call [recently] that it's reemerging and pricing is coming back and we're going to start working on that again. So it's sort of a mixed bag, I would say.

I'm curious about the CMBS market. What sorts of CMBS deals are getting done at the moment?

Gewurz: I would say that the CMBS market basically ... shut down, from my vantage point. What was interesting to me was what I just shared, that we heard [recently] that we're going to start up a deal that was shut down. I'm not sure if that's a trend. It's one deal in one asset class. But I thought it was a good sign.

You mentioned the multifamily sector. Is it your sense that multifamily isn't struggling as much as other sectors like office and retail, because multifamily owners have been more successful in collecting rent over the last couple months?

Tardy: That's my sense. I think it's not as impacted. Transactions are still happening. The longer-term impact remains to be seen, particularly in the more dense markets like Boston and New York. But I think those are the deals that are still getting struck in this environment.

Gewurz: There's a multiplicity of factors that affect multifamily. As Jared said, first there's dense multifamily, so urban, which has been a trend for the last number of years. Some trends get accelerated and some trends will get reversed. And one question on multifamily is, 'Is multifamily — urban, high-density multifamily in towers — going to be an accelerating trend or a reversed trend?' It's probably not accelerating, and we'll see how much reversal [there might be]. The other piece of multifamily is employment. I think we went into quarantine in most places in the country in the middle of March. And in some other places in the country not until even later. So April rents which were due at the beginning of April were very high on the multifamily collection. I don't have the numbers on May rents, but I would expect that they're not as high, and it will be a big question to see what June rents are. And the third piece is, at least if you have federal financing for multifamily, we're in the middle of a no-eviction period. So that also can affect behavior. But all of that will end at the end of June. All of the legislation from CARES Act that affects multifamily will end in June. I think we'll also see some distress in multifamily as folks continue to not have employment and be unable to pay their rents and are no longer subject to these [no-eviction] protections.

Is one of the next phases to watch, in your view, the evolution of multifamily as the federal assistance stops and perhaps different opportunities for doing deals come up later this summer?

Gewurz: I think that one of the things that will come out of this is more affordable housing. As there's more distress on employment, we've long needed for 50, 60 years more affordable housing, and we've tried every which way, and that might be one of the trends that gets accelerated through COVID, is more willingness from developers to invest in affordable housing. We're seeing some clients repurposing — this is a favorite topic — limited-service hotels, which are under extreme distress, and seeing if they can find the extreme opportunity in that sector, and then convert those to workforce housing. And I think that's an area that will evolve in multifamily.

It seems like every week there's a whole new set of legal questions, but also transactional and market questions. What are the most common questions you're getting from real estate clients now?

Tardy: We're actually getting a lot of questions about the return-to-work framework, and how clients and their tenants are actually going to reenter their offices and buildings. And we've been hosting training sessions with clients to quite a bit of demand from the clients' side, of course via Zoom, on various issues that employers face as we start to reopen the physical spaces in this climate. So we're answering a lot of those questions. Certainly dealing with the landlord-tenant discussion in retail and office, in terms of deferrals of rent during the quarantine period, and then certainly fielding many questions from our borrower clients and lender clients relating to the modifications of the debt instruments, which to date have been primarily kick-the-can extensions for three to four months, and so we anticipate revisiting those in the next few weeks. We'll see what happens with June rents in the various asset classes. But that will certainly, we think, result in more discussions about amendments to loan documents and lease documents.

Jared, I know you're in Boston, and I'm wondering what does the situation look like in Boston? What do the timelines look like in terms of starting to reopen?

Tardy: The city of Boston was pretty hard-hit by this pandemic, and notwithstanding the governor's guidance, the mayor has his own set of guidelines for reopening the city, which really relate to staging the reentry of the workforce, starting with the more essential services and then with nonessential type tenants. Law firms, financial services firms — the discussion at this point is revolving around capping the percentage of a workforce that's in a building in any one time, so that's what we're dealing with. Talking about numbers — 10%, 25% of the office population coming back in a staged reentry. It's a bit of a wait-and-see posture to see how things transpire here over the summer. Obviously one of the biggest challenges in Boston, given the density, is the public transportation and the fact that many people commute to work on buses and trains, and trying to figure out how to manage that in a safe and responsible way. I think we're going to be a little bit slower here in Boston to reenter.

Gewurz: One of the interesting things is that in Boston, as Jared said, the mayor was vigilant on keeping us closed and keeping us at home and keeping us safe. And one of the areas where there was lots of discussion was in construction and development. And plenty of cities had that debate, and plenty of cities kept their construction sites open with safety protocol, including in D.C., for example. But Boston closed. Boston, Cambridge, Somerville, all of our cities and towns closed construction sites. Shut them down. And we have some very large developments that are going on now, and they just shut down for numbers of weeks. And that was one of the pieces that just opened [recently]. The beginning phase of stage one, construction was restarted with safety protocols. So that's important for real estate in Boston.

Does that mean there were more legal questions with these projects in Boston versus projects in other cities, and what were you hearing from clients during the shutdown?

Gewurz: The first question that every lawyer in the country received in March was force majeure. And it came in every context, but the one where it is most applicable is in construction. And in construction loans. And so every contractor sent their owner a force majeure notice, and every owner sent their lender a force majeure notice, and then the question for lenders and for owners was, 'Should I send a response notice, and how strong should it be?' And for the most part in the early days, everybody was cooperating and still is, and collaborating, because it's nobody's fault that we're in this situation and everybody is trying to maximize the value for everyone. But when construction stops, there are extended time frames and there is increased cost and there are cranes that sit on sites unused that someone either is paying rent for or is not. And there is steel that's waiting to be fabricated or waiting to be delivered or not. And questions are starting to arise now. It's still largely cooperative and collegial for the time being as to who's supposed to be paying those increased costs resulting from closures and delays.

Has there been an evolution in the thought on force majeure over the past couple months? If so, what's your thought on where we are now with force majeure?

Gewurz: I would say that if any agreements customarily did not have force majeure provisions, they will have them in the future. Like, for example, purchase and sale contracts typically did not have force majeure provisions, and every purchase and sale contract that's been signed since March does have one. And then the better-negotiated force majeure provisions will become the standard de rigueur. So force majeure will have caps on time periods. It will exclude payments of costs, which most force majeure provisions already did, but some didn't, perhaps. And so there is a gold standard or an industry standard of force majeure that will now be adopted in most agreements.

Jared, what sorts of force majeure questions have you gotten from clients?

Tardy: A similar kind of range of questions. In the purchase and sale context, we've seen more attention to things like the definition of a business day. Normally, the industry custom is days that banks are open or closed for business. And we've seen some deals where that definition of a business day has been a change to reflect situations where, for example, registries of deeds are not open for recording or banks are not open for business. Not because of a federal holiday but because of a public health order or crisis like we're in now, so that it's clear, the contractual relationship of the parties with respect to business days and time-is-of-the-essence type clauses in those agreements.

--Editing by Kelly Duncan.

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