The COVID-19 virus has led to increasing restrictions throughout the country and while a necessary precaution, it will likely cause disruptions within the commercial real estate market (CRE). The National Association of Realtors (NAR) has advocated on behalf of realtors to provide support that includes:
- Small business Administration (SBA) loan programs
- 1031 Like-Kind Exchange deadline extension
- Qualified Opportunity Funds
- Remote Notarization
- Property Management Guidance
- Advocacy for both tenant and landlord support measures in relief packages
A recent survey conducted by CBRE shows the effects of the virus and rapidly changing landscape on transaction volume and value.
Mid-March saw a significant fall off in transaction volume (or supply) measured by deals coming to market and demand, which was measured by the number of confidentiality agreements signed. A significant number of 1031 like-kind exchange buyers looking for opportunities — especially multifamily units — are, however, still propelling market transactions.
The March 17 survey of capital market professionals indicated that these professionals’ client behaviors included:
- Over 50% of sellers delaying bringing their assets to market
- Over 70% of clients stating that they expected the disruption to last at least 30 days
- The size of bidding pools contracting by 65%, with about 80% of clients anticipating further shrinkage
- About 50% of buyers asking for price reductions for deals already under contract
- Two-thirds of buyers asking for a 5% price reduction
How Does the Future Look?
Alas, the variables and uncertainties with COVID-19 have clouded Magic 8 Balls during these unprecedented times. Few people prepared for this kind of global event, and it’s certainly not business as usual for most. Channeling flexibility and a willingness to adapt to changing conditions will likely yield the best short- and long-term results.
As calendars to flip April and looming deadlines for rents, loan payments, and carrying costs, landlords and tenants are trying to understand their rights and protections according to their current leases. Most legal experts recommend that parties work collaboratively to develop equitable solutions according to each circumstance.
Many tenants are requesting economic relief — rent abatements, reductions, deferrals, and application of security deposits — for the short term. But landlords must also examine the impact on their own finances of any economic modifications.
Currently, neither federal nor state governments have provided rent abatement relief for commercial tenants. However, the U.S. Small Business Administration (SBA) is offering low-interest loans “disaster relief loans” up to $2 million for small businesses and nonprofit organizations in Connecticut, New Jersey, and New York. Additionally, many legislatures are considering the adoption of insurance claims for business interruption (usually associated with a “covered loss”) to include COVID-19 as a business interruption.
Some states have implemented a moratorium on loan payments, evictions, and foreclosures; however, those moratoriums are state-specific. New Jersey’s Governor Murphy adopted Executive Order 106 — which halts the eviction of homeowners and residential tenants. This order does not, however, stop initiating eviction or foreclosure proceedings while in effect nor does it affect scheduling, rent payment deadlines, or a landlord/lender’s rights to pursue security deposits and personal guarantees. Order 106 does, however, stop enforcements of “judgements for possession, warrants of removal, and writs of possession…unless the court determines on its own motion or motion of the parties that enforcement is necessary in the interest of justice.”
Other Impacts on CRE
In addition to economic uncertainty caused by dwindling 401K balances, lost wages, and an inability to work, many consumers have and will continue to rein in spending. Changes in spending behaviors are already creating a ripple effect that leads to lower demands.
Entire Industries Have Come to a Screeching Halt
Construction companies, retail stores, entertainment venues, sports franchises, hotels, restaurants, and many other sectors have closed down. The economic stimulus package will certainly help many businesses, but some will still not recover. If those businesses rented or owned commercial real estate, those spaces will sit empty. New construction projects will likely also slow, decreasing the amount of new space on the market through the end of 2020, if not beyond.
A year ago, the Federal Funds Rate was 2.50. In late February, the Federal Reserve lowered the rate to 1.75. It’s been lowered again to 0.25. These low rates should make commercial real estate financing more affordable.
Not All Doom and Gloom
While COVID-19’s spread has certainly negatively affected the entire world and impacted all industries, there may be a silver lining for the CRE.
- Some investors may choose to invest in real estate because it offers a lower risk than the stock market
- Treasury rates have hit historic lows, so anyone with debt from home or rental property loans can benefit by refinancing debt to mortgages with much lower interest rates
- If demand for CRE increase and interest rates stay low, capitalization rates may continue to compress even further. Real estate investors who choose not to refinance rental properties will still see the value increase as cap rates compress.
- The requirement to work from home has created a tenant’s market, as office demand has decreased significantly. Tenants looking for new office, industrial, or retail spaces will likely succeed in negotiating favorable leases and terms.
Whether you currently own commercial real estate or considering investing in CRE, or want to learn more about the impact of COVID-19 on your investments, properties, tenants, the experts at CREA United are happy to answer your questions.