As an experienced broker, Natalie Hostetler, vice president of commercial real estate at Second Story Properties, has plenty of experience with the ups and downs of the Chattanooga business-property market. And as a native, she’s also able to look at past trends alongside pandemic performance and attempt to predict what 2021 will bring.
Here are some of her insights on how property owners and tenants fared during an incredibly challenging year, and what may lie ahead as more in-person operations slowly come back online.
How did you get into the real estate business in the first place?
Natalie Hostetler: “After I graduated from Notre Dame High School and then the University of Tennessee, I bounced around a bit. I was involved in pharmaceutical training and sales for eight years, and loved it, but decided I loved real estate even more – and so I went to work for a large real estate investment trust.
“I really got what I’d call my ‘Ph.D. in sales’ there because I had to learn a totally different language. But then I was able to converge the two by focusing on medical real estate. I’d spent a lot of time with doctors; I had some insights into what they were looking for when they needed a second or third office location. I understood their priorities and, even more importantly, their schedules. I knew what made them tick, and so that really helped me when I got into that niche market.’’
Even so, why not also engage in residential real estate?
“My mother has sold houses my whole life, and I can remember passing out cookies at open houses on a lot of Sundays. I loved the deal-making part of it, but for some reason I am geared more toward being able to understand what makes someone want a certain space of their business, the right spot to make their widgets or whatever it might be, vs. helping them find the right house or neighborhood for their family.’’
What did the onset of COVID-19 and the related shutdowns do to the medical community, and the medical real estate market?
“Prior to the pandemic I was working with a lot of urgent-care and fast-access clinics that have been moving into untapped markets, or those with little or no patient coverage, in the area. I was also busy helping cosmetic and aesthetic providers find secondary locations for their growing practices.
“Then March came. Suddenly we were all working on how to rearrange a practice for better efficiency, such as reconfiguring the waiting room. It meant everyone had to focus on taking a look at their resources. From the landlords’ perspective, it meant empathizing with tenants who were not open to see patients or make any kind of sales. They couldn’t pay rent. From March through June, I’d say I mostly focused on helping current clients understand their lease, how they were protected and how to work with their landlord on rent abasement or a release. I went from being a broker to a tenant coordinator, counselor, therapist and friend.’’
What affect did that have on the way you do business?
“It strengthened the relationships I had in place, and honestly it really helped me reevaluate my own priorities. And through it all I was also getting some larger deals we’d been working on for a number of months, or even years, closer to the finish line. Everyone wanted to be healthy and to be OK, and a lot of things that had been major sticking points fell by the wayside.’’
What’s the medical market looking like now?
“They are back to business. For those who I was helping with a new practice, we’re back to working with the architect and general contractor as we go through the lease process. This kind of sale is a lot like a marriage; you’re with this client until that building is done, until the buildout is finished. So, we’re looking at spaces and discussing how they can do as much as they did before with one less exam room, because one’s being turned into a space for virtual visits. We’re looking at where we can put a check-in station and hand sanitizer. And who’s going to pay for those reconfigurations? Is the Plexiglas going to be permanent? Do we put 6-foot markers out on the carpet?
“And for those practices who we were helping renegotiate an expiring or expired lease, it’s a lot of those same considerations. They are asking for some add-on’s and so myself and my colleagues have had to become experts on medical and lots of other types of businesses so we can understand those needs. And on the owner side, we’re looking at what the average rent or sales price is now vs. earlier this year. We are seeing a lot of right-sized rent deals going on, because if the market’s down $5 a square foot, that owner needs to adjust so they don’t have an empty space. It’s totally in flux.’’
Do you see commercial, especially restaurant and retail, rents stabilizing, or do you think they’ll drop more?
“We were seeing some high rents, and I think we’ll see a rightsizing there. Medical-office rents are often higher than traditional office space because of the extra elements required. The offset there is that they are a steady tenant, and there’s always going to be a need – their services aren’t something you can order online.
What other trends do you see for medical tenants?
“Telehealth. It was already in place, and now it’s truly the way of the future. We’re already seeing people adapting to it as they build out new offices or upgrade existing ones. Practices want an area for virtual visits, which means a quiet spot with good internet access. That’s going to get added into most new building deals and custom configurations to existing space."
What other industries have you integrated with during the pandemic, and what have you seen there in terms of this need to adapt?
“Back in the spring I helped three restaurant tenants, people I placed and have worked with for five years, open pop-up stores. It was just grab-and-go, and it gave them a way to sell when they couldn’t have people in their actual stores. We used some vacant storefronts – one was a nail salon, so a totally different space – so they could offset their losses and get food out in a way where this kind of pickup didn’t exist before. I can tell you that, whatever happens, curbside pickup is here to stay.’’
How would you define the ‘new normal?’
“Tenants are going to want more gracious landlords. Landlords are going to want more careful tenants. Lenders are going to be more careful and particular. All around, people just want less risk right now. I don’t see anything close to a recession; people are still going to want to work together, just in a more conscientious way.’’
How has Chattanooga done compared to other markets in the state and Southeast?
“The local government did a good job with communication. There has been some confusion around various mandates, and they did the best they could to explain it all and get information out. Medical providers and other businesses have been amazing. They served who they are there to serve.
“I work with some very large health care groups, and they were so intent on being able to see their patients. They transformed their facilities into testing facilities when it was possible. The word ‘patient’ came out of their mouths in every conversation we had – that was their sole focus. And landlords worked with them, in some cases giving them two months rent free and just adding those to the lease’s end.
“Everybody worked it out, everybody worked together, like we do in Chattanooga.’’