In an economy that has spent the last two years saddled with the impact of a global pandemic, rising inflation, and higher interest rates, the commercial real estate market has been no stranger to reconciling with new realities. Ohio and the region have experienced an increase in receivership cases, a common theme virtually throughout the Midwest. More recently, examples of receivership cases in Cleveland may help to color regional trends. The growing popularity of receivership administration can mean opportunity for commercial real estate professionals.

The rise of remote and hybrid workplaces appears to have reached equilibrium, albeit a new equilibrium. In the commercial real estate world, office and retail landlords have dealt with the historic disruption of the traditional workforce, resulting in unstable rent rolls from declining occupancy. While the pendulum has nudged away from remote work, real estate professionals must be prepared to face the reality of reimagining the way we work, live, and play.

Receiverships are up. Ohio’s rise in receivership activity is in-part attributable to factors predating the global pandemic. Although areas like Cleveland experienced considerable progress—especially to development in the central business hub—the turbulence of the pandemic put a spotlight on distressed and underperforming assets, non-performing loans, and declining occupancy of commercial retail and offices. The comparison to the 2008 recession need not be drawn, however, the coming years are likely to be fraught with activity in the real estate market. Many companies are still grappling with how much to require employees to return to offices. The seismic shift from the office to home, or a hybrid of the two, has presented the dual challenge of decreasing rent rolls and costly reconfiguration of office spaces when construction costs are at an all-time high. The outlook for big box retailers has been grim and malls have inched closer to classification as a relic of the past. Receivership presents the unique opportunity to preserve a distressed asset or business and maximize its value in the marketplace.

While the Midwest has generally seen a rise in receiverships, Michigan presents a unique example of a region that has comparatively staved off the commercial real estate foreclosures that Illinois and Ohio currently face.

Ohio’s examples:

On the local receivership side, a Cuyahoga County Judge approved the $40.2 million sale of the Westin Cleveland Downtown following a two-year court battle over the disputed hotel property. An earlier opinion of the judge stated that the “sale was fair in all respects … and provides an effective way to maximize the value of the assets for the benefit of the receivership estate and the parties with an interest in such property.” Counsel for the owner of the hotel, Optima Ventures, had hoped the sale would be delayed until the market found some stability, an equilibrium if you will: “We’re talking about how to maximize a substantial, better than $40 million property and not have someone come in and buy it off at a distressed fire sale.” The receiver of the Westin spoke to the fundamental concern at the heart of the commercial real estate market: “We don’t know when COVID is going to go away and what that would do to the price of a hotel.”

Occupancy after all may not be the end-all-be-all. The IMG Building in Downtown Cleveland had 90 percent occupancy at the time of the default, that has since dropped to 79 %.

In downtown Canton, the Huntington Bank Plaza has lost three floors of tenants over the past two years. The result of downsizing due to COVID and transitions to a hybrid workforce may only tell part of the story where two long-time tenants opted for offices outside of Canton, ostensibly in an effort to lessen its tax burden, and another law firm relocated downtown.

What does the future hold with respect to office retail and how does that concern real estate professionals?

The banking industry has signaled a call to arms in what is being fleetingly described as “the Great Reboot.” The largest financial institutions, in places like New York City, have trained their focus away from remote work in an effort to bring employees back to the office. JPMorgan Chase Chief Executive Jamie Dimon said in a letter to shareholders that the bank expected about 50% of employees to return to office fulltime, while only 10% would remain in roles that work fully remotely.

Citi group expects a majority of employees to be in the office at least three days per week and Bank of America expects to roll out flexible working standards to adapt to changing conditions.

Conversely, General Motors said it will not mandate workers return to offices before 2023 after it had told them a week prior that they would be expected to work three days on campus each week later this year.

While Ohio has recovered nearly all the jobs lost at the onset of the pandemic, and many Ohioans have seen pay increases in recent years, high inflation has wiped away much of those wage gains, Policy Matters Ohio reports.

While there are companies that will go back to working in person, and companies that are designed to operate fully remote, it appears that most companies are going to be somewhere in the middle. What this signals is that to the extent that companies continue to reevaluate their hybrid workforce policy, there may still be opportunity for improvement for retail office occupancy in Cleveland and in the region. The post-pandemic workforce landscape is likely here to stay, imposing difficult decisions upon office landlords about investing in the uncertain return of tenant improvements.

The landscape is not entirely bleak. There are encouraging examples like that of Detroit, which has only averaged 2.4 commercial property foreclosure filings per month since March 2020. Detroit’s success may be attributed to the health of its automotive market and its ripple effects. Northeast Ohio should look to this example in considering what advantages its own anchor institutions, such as the heath care sector, can provide in stabilizing the commercial real estate market. Cleveland has also engaged in a fair number of hopeful conversions from downtown office buildings to hotel and multifamily units. Last year the sale of 45 Erieview Plaza, a vacant office building in downtown Cleveland was purchased by a development company that plans to convert the office building into a mixed-used development with retail storefronts, 368 apartment units, a gym, and outdoor pool.

The reality remains that a wave of office leases inked in 2012-2015 as the region’s economy improved, will begin to expire in the next couple of years. The immediate and near term presents challenges that will test the commercial real estate market’s response to rebound to the impact of COVID. Receiverships will continue to be an effective tool in offering creative avenues to assist in the turnaround of commercial real estate assets. Receiverships present unique opportunities to commercial real estate professionals who are sought after by receivers to provide broker opinions of value. Receivers may also rely on the partnership of commercial real estate professionals to provide in-depth market reports to establish market lease rates, tenant improvement allowances, escalations, and other concessions. Proper legal guidance and direct communication with the receiver is crucial in the administration of the received assets. Receiverships play an important role as the commercial real estate pendulum swings towards equilibrium—what remains to be seen is how far we have come and how far we have remaining.