Commercial Real Estate Has Been Hurt Tremendously by COVID-19
In 2008, there was a cloud of uncertainty regarding normal people paying off their mortgages. The economy was in ruins, new jobs were sparse, and the market had shrunk by over 6 percent at year’s end. Fast forward to 12 years later, and a new problem has arisen thanks to COVID-19: commercial real estate.
Coronavirus and the Commercial Real Estate Market
Like the majority of businesses in the world, coronavirus has dismantled production at all levels. Hotels have been empty, restaurants completely shut down, boutique shops abandoned, and the list goes on. However, there is one main issue caused by all of this inactivity: businesses are unable to pay their rents.
Many states and government agencies have given leeway, providing businesses a safe haven from foreclosures. But the banks, real estate investment trusts (REITs), and investors in commercial mortgage-backed securities (CMBS) have all been left empty-handed.
The ones hit hardest have been the hotel and retail space industry. These are the companies that have seen the largest drop in revenue since the pandemic set in. People haven’t been traveling and are resorting to online shopping. While these may or may not be temporary behavior changes, there is a growing fear within the industry that companies - specifically CMBS due to their multi-layer ownership structure - are in big trouble.
When the businesses can’t pay their rent and the companies who own the properties can’t pay property tax bills, leverage debt, or properly renegotiate with their renters, the word “bankruptcy” begins rolling to the tip of everyone’s tongue.
Some building owners are now suing their tenants, like Simon Property Group, the largest mall operator in the U.S., and their lawsuit with GAP for $66 million in unpaid rent from April, May, and June.
A spokesman for Gap, Mark Daniel Snyder, says, “We remain committed to working directly with our landlords on mutually agreeable solutions and fair rent terms, just as our industry and government partners have sat with us in good faith to shape the post-COVID business landscape.” Investors are doing whatever it takes to get back at least some of the money they are owed.
On the other side of this, investment companies like Blackstone are raising billions of dollars in capital for purchasing these properties at a deep discount. They are seeing a great opportunity, similar to what they did with the 2008 Great Recession with residential properties. When this new money comes into play, we will see a reset in commercial prices unseen in decades.
The commercial real estate industry has grown to a $20 trillion market that’s teetering on a jagged balance beam of uncertainty. What happens next will depend strongly on the government’s actions and the staying power the pandemic has on the economy.
What is the Government Doing to Help?
Right now, the government is implementing several maneuvers to help the commercial real estate market:
Small Business COVID-19 Emergency Loans
From the U.S. Chamber of Commerce website: “The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program (PPP), the initiative provides 100% federally guaranteed loans to small businesses.” This should help small businesses pay off their rent to landlords but can be difficult to obtain.
The Federal Government has already purchased $9 billion in CMBS loan buyouts. This will help CMBS companies stave off the banks and other debtors, although more money is needed for this multi-trillion dollar industry.
Banks Allow Concessions on Loans
Donald Trump recently signed into law the Paycheck Protection Program Flexibility Act (PPPF). This new law relaxed PPP rules by allowing banks to be less stringent on loan repayments, both in amounts and time allowed to pay. This will provide some leeway but it is unknown how much more is needed from the government if this is not enough.
The Future of Residential Real Estate
There’s a strong conviction amongst the general public that this temporary movement to working from home will become permanent. Technologies like Zoom and the trustworthiness of eCommerce has spurred everyone in the industry to ask: what’s going to happen to all the empty space?
Working from home is forming a new developmental landscape around the country. There is a strong expectation that storefronts, like your favorite mall, and offices could be turned into new homes or places for recreational activities. There’s also a conviction that people will begin investing in larger homes with more office space.
For companies, much depends on how they decide to move past the pandemic. Work productivity across the board has been up since quarantine took place, making it more likely companies will cut overhead and operate solely online. And as for retail, online shopping was already about to supplant the brick-and-mortar store. The pandemic has simply accelerated their extinction.
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