COVID-19 Impact: A Real Estate Principals Roundtable
May 20, 2020
On May 6, our Real Estate team hosted another in a series of roundtable discussions with industry leaders to share insights related to the COVID-19 pandemic. Our dozen plus guests included developers, lenders, operators, and construction contractors. As with other similar virtual gatherings there were common themes, with some issues quite specific to geography.
Collections were stronger than expected for April rents in most segments. Industrial has been strong, driven primarily by e-commerce. Residential rent collection has ranged from around 90% to as much as 98%, with no particular weakness observed in the affordable housing or rent-stabilized segment so far. Where residential tenants are not paying, it’s usually due to predictable reasons including a loss of employment and/or delay in receiving unemployment benefits. There was anxiety about how May would turn out, but some early signs are positive as stimulus checks arrive.
The segment with the most variety in outcomes is commercial, with divergence between retail and office. Most office tenants are paying; in retail, however, there is a strong trend of well-capitalized large corporate tenants using the crisis as an opportunity to hoard cash and renegotiate lease terms.
Lenders have also seen challenges with non-payment that trickles up from tenants who have gotten the message that they should not be obligated to pay their rent or mortgage. It has been a challenge to communicate to borrowers that the message about relief applies to consumers, not business customers. Very few forbearances have been granted -- despite hundreds of inquiries -- given most borrowers do not want to provide all the information requested. With courts closed, borrowers are betting that lenders cannot begin foreclosure or other collection proceedings. In the securitization market – which had seized over the last 60 days – sentiment appears to be improving.
Anecdotally, valuations have been hit hard, with some appraisers adjusting cap rates much more severely than expected -- or that investors think is justified. Falling valuations have spurred estate planning where intergenerational transfer is an option. In the hotel space, a 20-30% drop is expected. Investors seem to be more focused on making debt investments for now, anticipating a multi-year recovery cycle. For operators with exposure to the New York market, rent stabilization laws had already reduced values by up to 30% pre-COVID, but there is a strong sense of cyclicality and confidence that an eventual recovery is imminent, though it may take several years. A more secular trend related to working from home has accelerated and is generally expected to contribute to a more permanent softness in commercial office.
The Paycheck Protection Program (“PPP”) has been beset by uncertainty in this setting, as the SBA and Treasury continue to roll out guidelines and clarify eligibility and forgiveness requirements. The dynamic nature of the stimulus program has contributed to indecision about whether to apply among real estate principals. Some have considered applying for assistance based on the collapse in their retail rental revenue, but have not pulled the trigger. Similar in terms of uncertainty, is whether insurers will be forced to pay business interruption claims. Some have filed and await legislative pressure to be brought to bear to force insurance companies to provide relief.
As the crisis continues to develop, flexibility and continuous communication will be the key to finding solutions to the challenges of this evolving market.