The real estate industry is facing one of the biggest unknowns since the financial crisis of 2008 and no one saw it coming. Although many investors are somewhat more prepared than they were in the last cycle, the shock and uncertainty of our outlook has caught most off-guard. Our markets were at an all-time high. Real estate values across all asset classes were at their highest level yet. Investors with recently closed deals are realizing that their value proposition today may not be that of yesterday’s. And one thing is for sure: Values aren’t going to be the same. Many investors have a similar sentiment – single family residential will likely be the least impacted. Hardest hit? Service-related assets. Hotels, restaurant, retail and commercial. Office leasing will slow in the short-term and vacancies will rise. The greatest impact will be in markets with high concentration of retail, leisure, travel and oil & gas jobs such as Las Vegas, New Orleans, Orlando and Midland, TX.
Hotels and the Hospitality Sector
With widespread travel restrictions changing daily, this is the most dramatically impacted real estate sector. In the short term, occupancy rates and operator’s ability to drive peak pricing will fall. Locations with higher proportions of international visitors will be hardest hit. Personal and business travel are immediately impacting this market as company conferences and major events around the world are canceled.
Retail & Commercial
According to Bloomberg, over 47,000 stores have already closed in 2020, reflecting a harsh in a sector that was already struggling. Online delivery platforms are now more desired than ever, and retailers without them will struggle significantly. Many retailers providing non-essential goods and many commercial tenants were forced to shut their doors due to shelter-in-place restrictions resulting in lost wages, layoffs and many struggling to pay rent. Some tenants may invoke the Force Majeure clause of their lease, stating that the Coronavirus is a force beyond their business’ control and demand relief from their rental liability. Retail storefronts may simply close. Yet as revenues plunge, landlords are still expected to pay their own mortgage, payroll, utility and real estate tax payments. Numerous relief options have become available from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Tenants and Landlords should be looking at the Economic Injury Disaster Loan Assistance program, the Paycheck Protection Program, and the expected credit facility targeted for midsize businesses.
Residential
Over the coming months as many individuals and families lose their jobs and business grinds to a halt, many multifamily renters will not be able to pay rent. The most important item right now is the speed with which individuals and small businesses are protected to be able to keep their businesses and pay their rent so that their landlords can pay their mortgages. The CARES Act has several provisions including support for individuals and small businesses. Subject to income and dependent limitations, every adult with a Social Security number will receive a stimulus check to help pay bills coming due. An additional $350 billion in low-interest loans are available to small businesses (including sole proprietors and independent contractors) with many qualifying as forgivable if at least 75% is spent on payroll-related costs. The Act outlined relief for multifamily borrowers by allowing forbearance on Fannie Mae and Freddie Mac loans in exchange for not evicting tenants. The Act also provides language allowing homeowners hurt by the crisis to delay mortgage payments for up to 12 months. The most important thing is to contact your lender proactively.
Final Thoughts
The immediate and direct impact of the Coronavirus on families and businesses is clear and many are hopeful that the Bipartisan CARES Act which was so swiftly enacted can just as quickly provide relief. The speed with which the virus curve can be flattened and subsidies from the stimulus package distributed will be critical to stemming the tide of foregone rental payments and avoiding the financial chain reaction that could inflict heavy damage on landlords and lenders across the U.S.
