As businesses are preparing for the worst and hoping for the best during the coronavirus pandemic, Shopoff Realty Investments CEO William Shopoff expects his company to sail smoothly through these turbulent times. The measures he has taken immediately after the state of California declared a state of emergency are the result of years of preparation for a shift in the industry, as well as his company’s experience in making acquisitions during times of economic distress.
Shopoff says he remains cautiously optimistic about how long it will take for the economy to recover. In the interview below, he shares his company’s strategy for upcoming months and the markets where the company will remain active.
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Market activity is changing under the impact of the coronavirus pandemic. How is your company tackling these challenging times?
Shopoff: The team is now very focused on our day-to-day properties and interaction with our tenants. This requires a higher level of proactive communication than usual, in order to help our tenants get through this challenging time, while promoting the safety and health of everyone in our sphere.
Our overall focus has been defensive, making sure we have our current portfolio under control and positioned to persevere through this tumultuous market. Additionally, given the nature of our firm and our history of buying during times of distress or dislocation, we are continuing to actively shop for strategic opportunities. Given that it’s currently extremely hard to underwrite in real time and that debt markets are in a period of turmoil, we have found ourselves only pursuing properties where the ownership group is under pressure or is highly motivated to transact.
What impact do you expect the pandemic to have on the commercial real estate sector?
Shopoff: At this point, we anticipate there will be a near-term downward price adjustment, but I would expect it to rebound very quickly, as the economy recovers. I also wouldn’t be surprised to see a full rebound in a year or so. The real estate markets we focus on are not overbuilt, and the need for housing remains very high.
I think the bigger impact is going to be from the user standpoint. Do office users further shrink their space requirement per employee? Do businesses decide we can use Zoom and other virtual meeting services, which would in turn require much less corporate travel and further impact the suffering hospitality industry? How many businesses will have to shut down, affecting various sectors? I don’t know the answer to these questions yet, but I know that we need to be prepared for structural shifts in the industry.
What measures has Shopoff Realty Investments taken so far as a result of the coronavirus outbreak? What are your priorities these days?
Shopoff: As a company, we switched to a fully remote operation on March 22. That has taken some adjustments, but we have a well-designed business continuity plan in place, and generally, we are functioning at a high level. Our expectation is that there may be operational modifications in how we design our workflow moving forward.
I am proud to say that we have been able to complete our accounting functions during this time, including the time-sensitive issue of finalizing audits and sending out thousands of K-1s to our investor base. That has been completely seamless and was done entirely via remote work. Several years of planning have solved for things that once would have been challenging.
Like many firms, we had previously transitioned to a paperless invoice system, and I can’t imagine how difficult simple things like bill paying would be with our whole team working from home, if we weren’t well prepared in advance.
Your company has started to focus more on entry-level product over high-end development opportunities. What drove this change in your strategy, and how have your goals changed as a result?
Shopoff: We had a sense that affordability, which was already a problem in many of our markets, would continue to present an issue. Although we still very much like luxury product and do continue to provide targeted product to that segment of the market, we felt that adding a product line that focused on the entry-level resident or home buyer, would potentially provide us a much greater prospect for growth and diversification.
What markets are you planning to focus on this year?
Shopoff: We are focused on both Southern and Northern California, as well as Nevada, where we continue to find the best balance of demand, demographics, barriers to entry and opportunity. That being said, we will purchase properties anywhere in the country, if we find the right metrics. I believe that this may provide the flexibility and opportunity we need to execute our strategy.
Shopoff is very active in California. What are your current investment priorities in the state, and what challenges are you expecting?
Shopoff: We believe housing to be a critical need in the state and an urgent issue of the governor, based on the multiple bills he signed in October 2019 aimed at boosting housing production. I believe that demand for new housing is always strong, particularly in light of population and business growth, and especially if we deliver product at the right price points, which then allows us to work on larger-scale projects. As long as we continue to focus on price point and location, we will not have to be concerned with sourcing customers.
Tell us a bit about your acquisition strategy this year. In what sectors do you see the most opportunities?
Shopoff: We will continue to look at land for residential development, both raw land opportunities as well as covered land—land that is currently used for something else—wherein the highest and best use would be a redevelopment as housing. Additionally, we are considering hospitality, due to the dislocation in that market, but with an eye on creating more long-term value from the properties themselves, instead of maintaining their current use.
You recently stated that your team will be focusing more on product design and paying closer attention to consumers’ real needs. Tell us more about this.
Shopoff: As we are doing more urban product, it requires us to be more thoughtful about how the consumer will experience that product. This thought process is the same for both for-sale and rental projects, as consumers are getting more sophisticated and are demanding the best at any particular price point. Focusing on creating quality product will generate additional value for our firm, and often without a commensurate increase in cost.
Can you share some details about a relevant project you’re working on right now?
Shopoff: We have several exciting projects in the works currently. We are planning to break ground on a luxury condominium project in Newport Beach, Calif., in the next few months. Parkhouse Residences at Uptown Newport will have 30 unique and elegant homes, each averaging 2,450 square feet. These homes will provide for single-level living in six-plex buildings, featuring private garages and direct elevator service to each residence.
Additionally, we are completing our approvals on our Magnolia Tank Farm project in Huntington Beach, Calif. This project will contain 250 homes and a 215-key hotel located directly across the street from the Pacific Ocean. We will be proud of this project once it is fully entitled and ready to be sold to a developer.
We have also recently acquired 5.3 acres on the Las Vegas Strip and will be entitling that property so that it can be developed into a 450-room, luxury-entertainment hotel, with close access to the new Raider stadium and the Las Vegas Knights arena. Dream Hotel Group will brand and manage the hotel after it is constructed; the hotel is scheduled to open in 2023.
Finally, we are working on a project in Richmond, Calif., right across from the San Francisco Bay, with direct views of the city. Here, we plan to transform 89 acres of prime bay-front property into a mixed-use housing development. This will provide new homes for area residents and important options for those who commute to San Francisco each day for work.
The Federal Reserve has recently made an emergency interest rate cut. What are your predictions for the lending climate this year?
Shopoff: Our belief is that rates will stay low for some time. Right now, the markets are in a period of extreme turmoil. But when they settle down, it seems we will have fairly inexpensive debt for the balance of this year, and likely the next.