Mitigating The Impact Of Coronavirus While Preparing For Opportunity
By Ed Rogan, Owner, Co-Founder
Amid the Coronavirus pandemic, the world seems to be spinning faster and faster every day. It’s Friday [April 10, 2020]. What happened this week? What is CRE going to look like in the days and weeks to come?
Everything that's been going on has been a whirlwind of unprecedented proportions. Companies in the CRE space were aware that there was going to be a major disruption coming in operations, and the market is starting to see the effects of that. Rent collection day came and went for CRE owners and investors across the country. One silver lining or stroke of luck was that few landlords were affected until April 1, with most being able to see the bulk of their regular March income arrive.
Many operators saw their numbers drop as expected. Those that took precautions to handle getting into this situation were able to institute some level of control over an uncontrollable situation, and to start taking steps to account for, and ideally find a solution to the uncollected rent that is on most CRE-industry minds.
As a whole, the industry is at the beginning of the Covid-19 pandemic, with all that entails.
Financial markets have been overloaded with applications for SBA loans, with many organizations starting to see those funds flow in. Ideally, these SBA loans that were released as part of the stimulus package are going to help firms cover their rent loss and to help them pay for expenses and allow them to maintain payroll.
These loans allow those in the sector to keep their mortgages up to date and to avoid taking any hits on their credit. Additionally, they’ll be able to pay their staff so that they can operate business as usual when this thing turns back around again. There is some light at the end of the tunnel, but most businesses are operating day to day. It seems like the market as a whole is hoping that the disruption period is going to be limited to April, maybe into May and then it ends there.
The Stimulus and How it Relates to Our Near-Term Outlook
The stimulus package that was presented by President Trump and Congress is basically going down two different paths, one for small businesses and business owners and the other towards individuals. The pandemic is an unprecedented situation, at least in modern times, with the vast majority of people sheltering in place. People are not able to go to work and the economy has basically shut down. There's a lot of lost income and revenue for businesses and lost income for individuals and families.
With the stimulus, known as T2 for the $2 trillion being injected into the economy, the concept regarding individuals is to help provide some relief in this time of the unknown with regards to the pandemic outbreak. It is designed to provide individual relief that can be used to pay rent, purchase food, clothing, water, and other basic necessities. For businesses, the main goal is to make sure that companies can keep their full staff on board.
This is all with the assumption that this pandemic eventually recedes and people can go back to work as normal without a complete depression taking place. Smart investors/operators should be preparing, and spending a lot of time putting documents together to apply for small business relief funding and putting policies in place for tenants to provide them with resources they need until the crisis abates.
Many forward-thinking companies are also putting into place employment measures and policies to work with local municipalities, counties, etc. At the same time, they’re putting in a lot of time and effort into trying to navigate these loan applications on their side. Things are changing by the minute and nobody seems to have a handle on exactly what the requirements are, what the guidelines and criteria are for the loans. It's a constantly changing situation.
Furthermore, to ensure a continuing flow of capital in the economy, there's a lot going on between the Treasury Department and the banks, who are supposed to be issuing these loans. It is a challenging environment for the Small Business Administration and banks who are tasked with delivering these loans to the population, with many business owners in the country all trying to apply for the same loans at virtually the same exact time. You can imagine the overload that this system is experiencing.
At the same time it is nerve wracking because operators want to make sure they can get the funds they need to keep staff paid and maintain operations when they don't really know how long it will take to receive aid – if at all. As an investor/operator, one strategy you can take is to hire somebody to help navigate these unfamiliar waters. They can assist with things like assembling loan and grant documentation, and corresponding with the banks, and in generally ensuring that you are positioned where you need to be to get the relief you need.
New Policies and Procedures for Landlords in a Post-Covid World
Apartment owners, just like tenants, are going to have to face the expense item that is related to the forbearance that is going to eventually be owed. With many lenders, commercial tenants may not have to pay on their notes this month, which could provide some relief, but it is forbearance not forgiveness which means these payments will eventually have to be made.
Owners who can, therefore, should maintain debt service now because if not it creates a logjam with multiple months’ worth of payments due later. This could take away from distributable proceeds that they would have otherwise used to distribute to investors.
Opportunities Going Forward?
So what do opportunities look like going forward? Before answering that you have to remember that right now, there are just so many unknowns. The first thing that apartments owners are trying to do is to make sure that everyone is well and healthy and that systems are in place to facilitate the wellbeing of residents. That includes working together at the property level with staff to ensure nobody has any major hardships that could otherwise be avoided.
Once that priority is managed, savvy operators are beginning to keep an eye out for acquisition opportunities. Some properties that are reaching loan maturities right now may find they cannot sell at pre-crisis valuations and are unable to come up with the necessary equity to refinance. These may provide discounted acquisition opportunities for investors.
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Will Interest Rates Help Shore Up Investments?
There are still ways to access capital right now with, for example, the agencies still lending on the debt side – but terms have become more difficult. Even though headline interest rates are at historic lows, banks are including risk-premiums of 50-100 basis points to every loan and in some cases requiring up to a year of interest reserve, even for stabilized assets. Holding twelve months of interest reserve sucks up liquidity and takes away from proceeds that would otherwise have been to distributed to investors. This means that while there may be buying opportunities, the availability of debt is restricted.
The big opportunity that's coming, though, isn't necessarily going to be from the capital markets in terms of cheap debt. It's going to be liquidity in terms of dry powder from the funds and equity to be able to buy low levered deals that are undervalued. If the capital markets stay tight over the next few months, and if there is a market correction in terms of valuation, we expect to see liquidity in the market especially for lower leverage deals.
To compensate for this, it will be important to have the investor partners who understand the opportunity this market correction and valuation dip presents and who want to benefit from the situation. Though it has impacted hospitality and office more than other sectors, we are already seeing cracks in multi-family pricing and expect that the real opportunities will emerge three or four months from now. We are preparing now for that time as it will be a rare buying opportunity and we are using our proprietary data analytics to keep an eye on the market and monitor for the inevitable rebound.
Light at the End of the Tunnel
Although we believe that this crisis will have abated by the summertime, we are preparing for a period of time during which things will remain challenging. We have prepared first our operating processes and established policies and procedures in all our existing assets to ensure they continue to operate at maximum possible capacity. With that done, we are now focusing on accelerating our business growth strategy and looking for undervalued acquisitions. We continue to monitor the situation, while remaining vigilant for both threats and opportunities as this crisis continues to unfold.
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