February 2 2021
Waller partners Bo Campbell and Chris Dunn discuss the pandemic's impact on the real estate industry with one of Nashville’s most prominent developers, Tony Giarratana. Which sectors were hit hardest? Which are poised for the quickest recovery? Hear what’s next from three heavy hitters in Nashville real estate development.
Here is a transcript of the conversation:
Morgan Ribiero: Welcome to PointByPoint. This is Morgan Ribeiro, Waller's chief business development officer and the host of the podcast. It's no secret 2020 was a tumultuous year for our nation's economy and every industry was impacted in one way or another, but particularly the real estate and construction industry.
Here to weigh in on how the real estate and construction industry fared against the many challenges are Bo Campbell, Chris Dunn and Tony Giarratana.
Bo Campbell is a partner and the co-leader of Waller's real estate industry team. Chris Dunn is a partner in the firm's construction practice and advises owners and developers with sophisticated construction projects on both transactional and litigation matters.
Tony Giarratana is the owner and founder of Giarratana Development with more apartments and condos in Nashville's downtown, urban core than anyone else. And most notably the 505 building - Nashville's second-tallest skyscraper and the tallest residential building in the state.
So I'm excited to have this conversation today. I think we're going to get some unique perspectives on the state of the real estate and construction industries and welcome everyone to the show.
So to get started, Bo, I'd like to hear from you first, just big-picture-macro level - how has COVID impacted development and construction? Both nationally and locally?
Bo: Thanks, Morgan. Certainly, there's been a significant impact on development and construction throughout this pandemic. It essentially resulted in sort of a pause in pursuing projects that had not yet gotten out of the ground. On the development side, projects became much more challenging to raise money as developers and lenders and investors do some analysis on how long the impact of the pandemic might be and what kinds of changes there might be in the markets that they were trying to develop in and what risks they might have to address in terms of analyzing their development and their investment decisions. Locally, Nashville has been blessed - we've shared some of those challenges through the pandemic. Nashville had a good bit going on already and projects that were started and funded, moved on and projects that were in the works - a lot of the pre-closing work continued to move forward with a lot of optimism about the prospect of having projects as the economy returned more to normal.
So that's been good. We have had fewer, groundbreakings than we had before, but we're still progressing along and Nashville's been very blessed to have had probably had much more limited impact on it from the pandemic than maybe many other markets.
Tony may want us to maybe want to weigh in on that too. Tony knows as well as anybody on that.
Tony: I think Bo, correctly, summarized the market from a construction perspective, on a national basis the most famous - or infamous - event occurred in New York city where they shut down all-non-essential construction in March of last year.
And that sent ripples throughout the market. We were procuring construction services at that time. Chris was involved in that and I think it enabled us to get very favorable terms on a deal because a lot of, folks who were negotiating with were having their business activities in New York and other cities like that dramatically curtailed.
And that was helpful for us. Locally, I think it was more of a delay. The quote of the year was from Alliance Bernstein. Their CEO was being grilled in a public setting and he said to Nashvillians in the room, he goes everything we said, we're going to do, we're going to do - it just moves the date six months. And that's what we're going to do. And brought that discussion to a close. And I think that's what's been happening. So more of a delay than anything else.
Morgan: Are there particular sectors or industries that have stalled and those that have pressed forward, like multi-family or, hotels, hospitality, any perspectives on that? Because it feels like multi-family has performed very well here in Nashville.
Multi-family is one of the most solid sectors of all the sectors. It's not quite as exciting as hotels, but more steady and secure. I think that's true nationally as well as locally. The reality for Nashville is that all these shiny new corporate headquarters that started a couple of years ago are all delivering in 2021 and 2022.
So these major corporate relocations, which had lit the market on fires, such as Alliance Bernstein and Amazon, Asurion's expansion. E&Y's relocation - all these announcements, that got us all excited are now going to be delivering their employees. There may be fewer employees because of distancing and what have you, but it's a tremendous number of new employees. Thousands of new employees, and that has led to performance such as the U-Haul test, who would've thought we'd be talking about U-Haul, but more one-way U-Haul trips into Nashville than any other city in the country. That's not just on a per capita basis. That's on a pure numbers basis. That's staggering for Nashville. And it's these jobs that are creating these relocations and it's these relocations that are creating demand for multifamily housing.
Bo: I'll jump in and say other sectors. Retail and hospitality had been hit terribly hard. I think it's no real secret. With hotel occupancies just falling off a cliff and significant restrictions on restaurants in terms of some places not being able to operate at all - many places on very restricted operational guidelines from state and local governments. Those are the primary places I think got hit the hardest, for sure.
Chris: I would agree with what Bo and Tony said in terms of the sectors. I agree retail and hospitality purely from a construction standpoint and with office, if the project was ongoing, as Tony alluded to it, it stayed on track.
I think two sectors that really weathered COVID-19 and just kept moving were both the multi-family and the healthcare sector, but there are two sectors that really caught on fire. Almost, the opposite of retail and hospitality, and that is some parts of manufacturing, particularly manufacturing that had to do with recreation or anything involving people enjoying the outdoors. If you're trying to buy a boat now, you're in the used market because they just can't manufacture boats fast enough stuff, But there's another sector and we do some work here for clients in that space in the firm is highway work and horizontal work - roads and bridges - and that sector is doing phenomenally, and it's never been a better time to do that kind of work because traffic is down so much and lane closures are down so much. So contractors are getting that work done in half the time of what things typically took and the pricing has really fallen as a result because they're able to get through things very quickly.
So when you look at sectors it really does matter to be accurate about what particular area you're talking about. And I also think that Bo and Tony are very right, that when things normalize and when the national economy is healthier, Nashville's really poised to be strong. All the fundamentals to me that were really fueling Nashville's growth are still going to be here on the backside of the recovery.
Morgan: That's really fascinating. I had not thought about road construction or bridges. That makes perfect sense why now would be a good time to take care of that. Moving on to the challenges, because there were certainly challenges that we all face with COVID-19 in particular, in the real estate and construction arena.
Bo, I'll start with you. What were the biggest challenges that developers faced in 2020? Anything in particular? And I'm curious if some of those challenges are here to stay or if it changed your practice in particular?
Bo: I think a couple of things when you talked about real estate developers and real estate broadly. One is we all had to get refreshed in how to work out difficult projects and figure out ways to negotiate extensions and deferrals of rent and deferrals of loan payments and restructuring of transactions. Because really everybody was thrown into the soup at the same time - borrowers, lenders, investors, and everybody else. And so tenants, landlords, everybody. And so you had to learn to work together collaboratively to hopefully facilitate a long-term healthy result out of the project - the shopping center, the building, whatever it might be. So a lot of recalibrating your outlook on things to take a little bit more realistic and conservative outlook going forward on cash flows and ability to address lender and investor needs.
I think another place you're seeing this, it's really an ongoing matter that sort of a work in progress, which is how if you're in the office building business or the retail business, what does it look like on the back end of this? So how much more bricks and more retailers are going to be when people have been ordering by the billions of dollars online and having things show up in their front door, eight hours after they put the order in, from groceries to diapers to napkins to paper products, everything else.
And then office, as we all know, many people don't go to the office much anymore, or they go intermittently. And so if you're in the office world, you're trying to figure out how's that going to change? And, what's the long-term impact of that? Are people going to continue not coming back or will they share offices and come back part-time and hotel and those kinds of things. So those are where I really see we have to rethink how you look at the real estate world, at least in some of the things I've seen.
Morgan: Absolutely. Chris, any thoughts on that?
Chris: I agree with Bo there's going to be a lot of around office. Certainly, I think everything has a flip side to the coin though.
And with that uncertainty in office, we're also seeing in middle Tennessee - and there've been some really notable projects - the demand for logistics and distribution centers and things of that sort just explode. Nashville is a trucker's day drive to 80% of the U.S. population and we're so central there's three interstates that tie here. Obviously, that fueled some of the headquarters and income tax policies help that too. But logistics centers are really coming to our region. The largest building in Tennessee is being constructed right now and it was built through COVID. And they took that particular owner, some really progressive steps to keep their workforce healthy.
They had a very centralized check-in on temp checks and laborers were actually put into lodging where they could be individually and kept in rooms and that sort of thing. Bo's right about everybody having to adjust, but there have been some recent examples here in middle Tennessee, particularly on the logistics and distribution side, where owners and developers found ways to get their projects done on time and, pretty close to budget just by being a little creative. So that agility that Bo talked about being necessary I think is right on the money.
Morgan: Chris, based on new construction projects that were coming online, how did COVID impact that and how has it impacted things that maybe were already in the works?
Chris: Yeah certainly for negotiations that were occurring during the COVID phase, it really shifted some of the emphasis onto the provisions that would relate to delay, and what would constitute excusable delay and what could be captured, in a liquidated damages clause, but it also shifted.
Contract negotiations into an area of worker safety. And maybe that was good for us. Maybe, that was overdue. And there was a lot of thought given to, where workers assemble on a job site and where they can take their meals and where they could rest and you know how they could be.
Tracked and monitored, construction is in some ways a tough industry. And it's an industry where people really seem to understand that, they get paid, for their work, for their labor. And, there was a recognition, I think in part that some people were still coming to work, even if they were ill or you're or maybe should be sitting out.
And that caused some really interesting conversations between general contractors and developers and owners. And some owners said, "You know what? We're going to pay people to stay out if they are ill. And we've got to keep the work going on the project and we've got to keep workers safe. And if they're not getting paid when they're not at work, it's just an incentive for them to make ends meet and we've got to look beyond that. I saw some things on worker safety and on delay provisions that just hadn't occurred in the 20 years that I've been working on construction law.
But I think some of them are here to stay and some of them are really for the good.
Morgan: Tony. Any thoughts on that? I see you nodding along to Chris's comments.
Tony: I think the question was the biggest challenges that developers faced in 2020. And a lot of my friends that are in the hospitality and retail sides of the business, they really suffered. And even folks that had shiny new hotels under construction, that was a big decision to complete those hotels.
And they're largely non-performing right now. So my heart goes out to them. But I think developers generally, we look for positive feelings amongst debt and equity providers; consumers having very positive outlook on the future. They're more likely to buy our condos or move up to one of our newer and better apartments.
And so 2020 was a very difficult year for everybody. And consumer confidence and investor confidence, was really shaken. And that just makes everything else harder.
Morgan: Absolutely. Chris, any other sort of lessons learned from all of this things that, had we known a pandemic was coming our way, maybe we would have done things differently and moving forward, it will certainly shift our perspective and how we approach projects from all your various points of view and areas of expertise. Chris, you have any thoughts on that?
Chris: Yeah, I do. A couple of ones right off the bat. I was practicing law and I know Bo was, and Tony will remember this well, when we had our downturn in '08 and '09.
And there, were some similarities here and what it made me think about was when times are flush and there's a lot of deal movement, it's easy to get into being a prisoner of the moment or in a little bit of a rut where you're working quickly on deals and you're getting them done.
You're having your negotiations, but there's a routine that can really settle into and clauses that deal with the risk for delay and the risk for escalation of material costs, can become boilerplate to you pretty easily.
And I think one of the lessons learned is, none of us know what's going to happen at any given time and being able to think and reflect on uncertainties and how they could impact your clients is just a lesson from this experience. I know we'll have others in the future, I'm never going to look at a force majeure clause the same way. How can you? In my world, that's delay and that's pricing and that's a risk-related terms, but we've had floods in Nashville and certainly the national economy things have affected us. And, we have tornadoes and this is just another reminder, that really keeping your mind in the deal and what can happen is important when we're doing the work of good clients.
Bo: Chris hit the nail on the head. No one will ever look at a force majeure or a delay provision in the contract again without thinking through it. What we're going to go through a lot of back-and-forth while the market figures out what, where the appropriate landing place is for those provisions going forward, which it will do at some point. That's been a huge part of it. And it just interplays in Chris' world. It's a huge thing because they live and die on construction schedules and liquidated damages for delay and things like that.
But it also happens with investors and lenders in projects that have commencement dates and completion dates, and who expect you to get into a building at a certain time and things like that. And it's going to be a lot of lessons taken from this about how to craft those kinds of provisions.
And the other thing that I'm seeing a little bit more often now, or tenants trying to negotiate some ability to reduce their lease space or get out of leases or get out of parts of leases when certain kinds of unforeseen economic or community events occur and trying to pre-negotiate an ability to pull space back. That's obviously very challenging for a lot of reasons, and that's in its infancy, I think, but that's the kind of thing people are thinking about. You don't have to walk around many cities - Nashville, certainly no exception - and realize that most of the office buildings downtown, are over half empty every single day.
And so someone's paying rent on most of those. And a lot of those companies would like to have had some ability to pull back on some of that, even if it costs a little bit of money on the front-end. So I think we'll see some of that going forward too.
Morgan: Tony, anything from your perspective?
Tony: Throughout my career, I've been mindful of that little saying. "There's no ship that's harder to sail than a partnership. And that's motivated me to have good partners 2020 really underscores the need to deal with great people. When the going gets tough, you need everybody to get going. And that doesn't mean run. So we were blessed to have great partners and so we were able to weather all that 2020 threw at us. A number of my co-developers out there, I've watched them take some pretty severe beatings because they maybe bought capital from the wrong sellers.
If anything, 2020 just reinforces the need to really deal with people. People you like, people with good reputations and when the going gets tough, you can all work through it together.
Bo: Tony. I think that's a really great observation that made me think about several projects in lots of different ways.
You can borrow money in the real estate world. And knowing your lender and having some relationship can be really important. There are financing vehicles that are very structured and they're done purely on a pricing basis without any relationship between the borrower and a lender, they're securitizing a big market, there's nobody over there calling you, they're calling the borrower every day. And so when the going gets tough and you've got issues and you've got to go back and deal with your lender and you can't find them, or is there some institution where there's really hard to find the person who could make a decision and there's a big process to that competing?
No, it's enormously challenging and I'm not saying those deals aren't great deals because the rates can be very low and lots of other reasons to do it but this is an example of a time when it's sure nice to be able to pick up the phone and you call Janie Jones, who's been your lender for three years and say, "Hey, we've got an issue. Let's work together." And you know that, Janie can work with you and not spend three months just trying to find somebody to work with. So that's a huge lesson.
Morgan: I'm curious more specifically how construction has been impacted such as material pricing, labor costs, project delivery, times you name it. Just beyond the potential spread of the virus and having to shut down job sites, but there are other impacts that the pandemic has had on construction. So would welcome what you have on that topic.
Chris: At the top of our session, Tony mentioned that in that second quarter or March until let's call it June or July there, I think there were some real opportunities in terms of owners and developers getting some favorable pricing on construction services, in particular.
That was a window of sorts and Tony and some other clients of ours, in the face of a lot of uncertainty, still inked deals and still moved forward. And I think they got some very good deals as a result. That started to change in the fall though and that trend has continued.
As many of the listeners may know here, lumber prices year-over-year have increased almost 150% of what they were this time. Last year, structural steel is now starting to really move up as well. Some contractors have told me that it's 15 to 20% higher than it was this time last year.
And then as for other materials, anything with a really long lead, particularly if it involved foreign manufacturing or shipment, now has almost doubled in the time that it takes to get it. And this is particularly true with finishings, things that go in at the very end of a building, and maybe, produced overseas and far away from here where we're production has been hit.
In terms of materials, it's always supply and demand - right now, demand for materials is higher than the supply can deliver. And so we're seeing the escalation and the inflation that you would expect. Hopefully, that eases this year - maybe in the second half of the year - but in terms of pricing, I think it's fair to say that.
A lot of the good design firms and contractors who have great reputations have been getting leaner in the last year. I would expect that to continue such that in the fall of this year if demand really does increase for design services and construction management services, I think that a lot of owners and developers are going to find that their go-to, favorite design firm or two is a smaller version of what they were, maybe 80 or 85% of what they were pre-COVID, and their capacity to do the work as quickly as is not going to be there that, same thing on the construction side, the business owners for design firms and. construction firms are being conservative as well.
They're not hiring like they used to and where there's been attrition. I think they're not hiring back. And so, as a result, in terms of pricing for design services and professional construction services, I think things are going to get more expensive in the fall. And I think people who did move in that first half of last year are going to be rewarded.
I think material pricing probably is on the rise, at least for the foreseeable future, until the distribution chains can really get back online. In terms of labor prices, they got softer in the period that Tony was describing. And they've been, and even or maybe down a little bit, a lot of people I talked to who are in a position to know why that might be softening really couldn't tell me why exactly that.
Labor was getting a little softer. But it apparently still is the case that the problem is just the materials have gone up. So it's definitely a mixed bag. And on the delay, there absolutely was a lot of delay imparted to projects in 2020 and there probably will be some in 2021.
I think we're more adept at dealing with COVID-related delays now and the prevention measures are so much better than they were, but at the end of the day, owners and developers paid for a lot of that delay and their lenders to some degree. Most contracts would allocate COVID-related delay into an excusable form of delay so it wasn't anything that really got terribly contentious last year. There wasn't a spike in litigation that I could see - maybe that's down the road, but owners really - by and large - had to absorb it and mitigate it. It's unprecedented for us to have a pandemic at this scale, but largely that that came out of owners and developers pockets.
Tony, would you agree in your experience that's really who paid for it?
Tony: Yes. you're absolutely right.
Morgan: So looking ahead to this year, 2021, we're obviously still grappling with the impact of the pandemic and still living through lockdown down in many ways. Although Chris, as you said, we've it's become a little bit normalized and it is our current operating environment. As we look to this coming year, are you optimistic about it? How are you thinking about this coming year? And are there particular sectors that you're optimistic about?
Chris: I'm really bullish on healthcare picking up speed and in 2021, part of it is just to accommodate some more need for patient beds.
I also think logistics will be really good sector. I think that that highway work and road work and that kind of civil construction- related sector will be a really good one. I think there will be areas of manufacturing that are really red-hot, and I'd love to hear Tony and Bo's take on this, but I actually think multi-family will come back very strong in middle Tennessee.
One thing that I saw in a number of instances is more of a desire for people to be in places like Nashville or Austin or Raleigh or South Florida or Tampa - places where there's a little less density. And I think there was already a trend that way.
And I think that COVID and the pandemic actually are going to accelerate movement into cities and regions, like the ones that I just mentioned and that multifamily will have to keep up. Anyone who's looked at home prices in Nashville over the last year knows that they have just exploded.
And so that at least from my little corner of the world, that's what I see. Fellows, what do you think?
Bo: I'm pretty excited about 2021. I think that one thing we haven't mentioned that I think is really impactful in construction and development is the significant drop in interest rates which appears to be - at least in the medium term - to be going to continue. So it gives folks like Tony a lot more confidence about borrowing money. Knowing that rates are down and likely to stay down for awhile and makes their projects more affordable, helps offset some of these construction pricing costs that Chris has alluded to earlier. And I am excited about the future, particularly. I think multi-family has been great We've got so many folks. Office will be more of a challenge, I think, because we do have some great new projects coming up. As Tony's mentioned, a lot of the folks are moving in, but there's also space in those buildings besides the headquarters that needs to be filled. And that's going to be a little bit slower to fill back up.
In retail, hopefully, what we'll see is a big push. I hope a lot of people have pent-up demand to get on the road and travel and stay in hotels and go out to eat and eat something besides whatever they can order and have DoorDash deliver every night. And hopefully, other sectors will really see a significant rebound as the year rolls forward, particularly the third or fourth quarter.
Tony: I'll add something I say often, I feel blessed to be in this city in Nashville, Tennessee. So many people want to come here because we have so much going for us. It's certainly possible for us to screw it up, but, I think we're all smarter than that. Being in Nashville, Tennessee, I've got a great deal of optimism about 2021.
I think that Nashville typically has a soft landing during the downturns and rebounds quickly as things turn around. And I already feel that happening in Nashville, from a multi-family perspective, we have developed a dozen-and-a-half multifamily projects and condominium projects and right now is a great time to have apartments available and condominiums available for sale.
The market is very strong and is only going to get stronger as the year progresses. And these corporate headquarters are full, even if they're half-full. That's a lot of demand coming in for well-located walkable condominium, residences and apartments. So we're very excited about 2021.
Last year, when things turned down, we could have easily turned the lights off and said let's just wait this out and see what happens. But that's not what we did, as Bo and Chris know, we doubled down and I saw the little skeptical looks in their eyes a time or two. But we believe in Nashville and all the above that we just discussed.
And we wanted to put ourselves in position to capitalize on what we saw coming in 20 21 and beyond. And I think we've done that. So we're very excited about the year.
Morgan: Tony, I'm curious and I'm sure our listeners will be to - any projects in particular that you're excited about and that are in the works.
Tony: I like all of our projects for different reasons. 505 was the most recently completed. That project was flawlessly executed. My hat goes off to our team members, Chris and Bo, and our project managers and contractors. That project - from start to finish from mobilization to first resident occupancy - hard to believe was 23 months.
Think about that - a 45-story building. And so that building was completed on time and under budget. Has performed for my partners and I, and we're very proud of 505. Our twin towers - they're not identical twins - but they're architecturally, compatible buildings that we are preparing to, start work on at Ninth and Church.
Those will be really cool buildings. And when you add up all the floors, it's including the 34-story building, the 38-story building and the underground parking we have over a 70-story tower getting ready to be built. It just happens to be on sites across the street from each other.
So we're very excited about them. We challenged our young architects to come up with a design -architecturally stimulating. And they asked me what that meant. And I said, you'll know it when you see it. And when they sent these over - we received them, got excited and said, proceed. These are perfect. And so I hope you like them when you see them. They'll be stunning additions to the Nashville skyline.
Morgan: Awesome. I look forward to seeing those. And I know we've enjoyed watching all the towers. Our offices are in downtown Nashville, and it's been fun to see those projects. Anything else? Any parting words, anything that you're most looking forward to this year as it relates to development and construction.
Bo: I'm excited at the prospect of closing on some new project transactions around Middle Tennessee and the world. It will be nice to have closings on large transactions, which I'm very hopeful and optimistic we'll see this year and start watching some new cranes go up. That'd be great.
Tony: I'm not at liberty to disclose what I've heard, but I understand there's potential for some very exciting announcements about expansions and corporate relocations that will be every bit as big as what we've already experienced. So I'm very excited about that. I think that's going to cause the national spotlight to shine brighter on Nashville. So very excited about that.
Morgan: We'll be on the edge of our seats waiting for those announcements. But more positive news, definitely for Nashville. And it all goes back to your U-Haul- statistic. I saw that news article, awhile back, and it really is pretty stunning, to think of that, but there are so many trends just directing more folks this way. Working for the best for all of us. So Chris, anything else from your perspective?
Chris: I echo some of the optimism and hope that Tony and Bo have mentioned. Middle Tennessee real estate is still really affordable compared to a lot of markets. And I think that in time, COVID will be something that Nashville's regional economy just overcomes and Nashville is in a really strong position and it's a great place for business and we're fortunate to be here.
Morgan: Thank you all for joining me today and look forward to continuing the conversation in the future.
Tony: Thank you, Morgan.