Real Estate: Dealing with a deadly virus and what’s on the other side

Terry Montesi

Terry Montesi, the founder and CEO of Trademark Property Co., is known both locally and nationally. Locally, Trademark has helmed the development of WestBend, a mixed-use development in the University District, directly across from University Park Village, and Waterside, a 63-acre hybrid community and lifestyle center on the Trinity River in Fort Worth.

In its 28 years of business, Trademark has invested in, developed or redeveloped 19.5 million square feet of retail and mixed-use assets worth $4.5 billion.

That development has been based on a philosophy of creating meaningful customer experiences, collaborating with communities, and unlocking potential and the tenets of Conscious Capitalism.

But COVID-19 has no respect for vision or philosophy or intent, and Trademark has had to adept and manage through the pandemic, as have all companies large and small.

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But he is convinced that there is a brighter future as the nation learns to deal with the pandemic even though that future may look far different than what it replaces.

The Fort Worth Business Press spoke with Montesi about managing through the crisis and what lies ahead.

FWBP: Talk to us in general about your business and trying to cope with COVID-19.

Montesi: The last nine months or so has been brutal, for the retail industry and the retail real estate business, with few exceptions. Grocery anchored centers with top grocers have really not been hurt that bad. But virtually every other type of real estate, retail real estate, office real estate and hotel real estate has taking a beating.

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Our business, the first few months it was hunker down, try to survive with your lenders, and work on workouts with your tenants. That’s kind of mostly been done the last few months, and we’ve been getting back after getting the deferral agreements done, and getting everybody reopened.

We’ve been back just trying to help our tenants survive. And try to figure out ways to do marketing and hold events and programming in a post-pandemic or, I guess, in a pandemic world. It has been extremely challenging. Traffic has been down materially, sales have been down materially.

FWBP: How has that affected your bottom line? In your wildest imagination, did you plan for anything like this?

Montesi: No. Retail already was having material headwinds and we were planning for that, obviously, but we did not have anything like this in our planning. The majority of our income, about two thirds of our income, is from management fees and development fees. I guess when you add development fees, it’d be more like 70, 75% of our income.

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And when the tenant’s not paying – getting the income in – you don’t get a management fee on it. For a number of months, our collections were 40%, 50%, 60%. And then 70%, now up to 85% or so. It was an enormous hit on our revenue stream.

FWBP: Did you have to lay people off?

Montesi: We didn’t really have layoffs related to it. We’ve made slight adjustment to bonuses, but we applied for and received a PPP loan. And that helped us. It really did. In our particular case, it worked like it was supposed to, because we had a real loss of revenues that wasn’t going to come back and without the PPP loan, we would have had to have significant cuts.

FWBP: We have talked in the past about the future of Mall America. What impact have you seen? Has this accelerated that decline of traditional malls?

Montesi: Absolutely. Two reasons: One is, people feel less safe indoors than outdoors, during this particular viral pandemic. And the second one is that many of the tenants that have taken the hardest hit are conventional mall tenants, conventional, fashion tenants.

There was already headwind in the mall space, and this just accelerated the headwinds and accelerated the decline of what was already declining – traditional, not special, fashion retailers like Ann Taylors and Ann Taylor Lofts and Chicos and many, many more.

FWBP: What do you think the other side of this thing looks like?

Montesi: For our planning purposes, we think things are mostly back to normal, from a shopping patterns, in-person shopping standpoint, for third quarter [of 2021].

What does it look like? Well, we believe there’s pent up demand for people to connect with people, people to see people, people to interact with people, people that ask people for their advice and people to hang out in public spaces and go to restaurants. People will be tired of doing everything online and be tired of staying in the house.

Will there be some things that’ll change permanently? There will be a lot more store closures this year. People forecast somewhere around 10,000 store closures. There’s already been around 8,000. And they think there will be maybe 2,500 openings – 7,500 net store loss. So, that has a pretty big impact on shopping centers. There’ll be winners and losers, and we already have too much supply of shopping center space in our country.

And so we think this will accelerate something that’s been needing to happen for a while. The winners will start to rise and the losers will become more obvious. And some of the losers will be repurposed. Some will be demolished, and it can’t happen fast enough. We typically don’t work on the losers.

Will there be permanently more focused on fresh air designs that either have more outdoor seating or more fresh air flowing through restaurants? Absolutely.

Will there be certain types of tenants that were providing things that were commodity, that people are now getting online and they just don’t need to go to the store, that those retailers will be hit hard? I think those would be some permanent changes.

But I do think in things like mixed use places and lifestyle places that have great public spaces and great programming, people are going to want to go back. But we’ll design those a little differently. We probably won’t design things for people to be quite as close to on top of one another. In office design, there’ll be more infrastructure required for health and safety things and fresh air, things killing viruses. And there will be a lot of good as a result.

FWBP: You are describing what you’ve been building or at least trying to build, for a while. So, you’re ahead of the curve on this from most development companies.

Montesi: I think it is harder to get people off their computers and to retail places and to retail anchored mixed use places. And so you need to offer a real experience. You need to offer an experience you can’t get at home. And yes, we’ve been focused on experience related latent places. We’ve added a guest services division, and we took over the concierge at Galleria, and we’ve added a bunch of services for customers there. We’ve added a concierge and guest services program at our Watters Creek project up in Allen. And so we’re evolving and think that it’s evolve or die. And we would rather evolve than die. That’s our plan.

FWBP: Let’s talk a little bit about office space, for a second. What’s the implication on people learning they can work at home?

Montesi: We don’t believe that a majority of companies are going to go to a completely virtual or remote workforce. We do believe, I think the data’s already there, that most office employees will choose to work one or two days a week, remotely. And virtually, every employer, I bet 75% plus will allow them to do so.

There are certainly some jobs that don’t translate very well remotely. And some do better.

Think about real estate companies, investment companies, a lot of people that are innovating, those people. How do you train a young person, if you never in an office? For young people to learn to collaborate and innovate [is easier] if you’re in an office. So, I believe, still most firms will want offices. I do believe that they will look different five to 10 years from now.

And so, what does that mean? I think you’ll have a lot of offices where people don’t have their own individual office – a hoteling concept. They’ll have offices, they’ll have cubes. And people of a certain level, they’ll have an office. That’ll eliminate the need for a certain amount of space.

But, then people will want larger spaces and they’ll want larger common areas so if you want to sit six feet from a person at your company and still have lunch in the same room with them.

I’m not sure there’ll be a huge reduction on the demand side.

I think it’s going to make office buildings that are difficult to evolve into sort of safe, post-pandemic places, very vulnerable. Some of those may get converted to hotel or residential, or demolished.

Old, tall buildings would worry me. Fortunately, we don’t have a portfolio of tall, big city, office buildings that are older. They’re going to have to invest a lot of money to make people feel safe, if they can.

FWBP: What’s the financing look like these days in mixed use development?

Montesi: I think talking about what financing looks like today, or what demand for office space looks like today, is really not relevant. In my view, during the pandemic, it’s just not really reasonable to make long-term commitments or decisions. And so, there’s really hardly any financing for anything that’s got any retail in it, or that has any office in it today, unless it’s fully occupied by credit tenants. I believe it will go back to a healthy, reasonable market, post-pandemic.

But retail, office, mixed use, there’s really no financing for it today. But nobody with any brains is trying to deliver any product today, either. We’re all just going to kind of hunker down and wait this out. Then the market will go back more to normal and underwriting will be based on all the things it was always based on – location and credit and sponsor quality, et cetera.