As millions of people are told to stay home from work and shelter in their homes the question remains, if people are not going to work and making money how can they afford to stay in their homes? How can business keep the doors open if they are not bringing in money to pay the rent? This may be the biggest catch-22 the United States has been presented with since the Great Recession in 2007-2009.
According to data collected from ccim.com, here are a few ways landlords and tenants are dealing with these tumultuous circumstances.
Rent Reduction: The landlord can reduce the tenant's rent for a portion or all of the term left on the lease. The usual forms of rent reduction are to reduce the base rent, operating expenses, or both. In regard to retail, it is possible to convert base rent to percentage rent.
Rent Deferral: In this case, the landlord can defer a portion of the tenant's rent but would require them to repay the rent deferred at a later time, either in a lump sum or by increasing subsequent payments. A variation of rent deferral could be to cap or set a base year to operating expenses for a short or extended period of time.
Rent Abatement: If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter.
Loan Conversion: Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The tenant would, however, continue to pay the current rent. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
Application of Deposit: If the landlord holds a deposit, this amount could be credited against the tenant's current obligations.
Subletting: Bringing in a new tenant (for part of or all of the rented space) could reduce or eliminate the rent obligations while replacing revenue for the landlord.
Unfortunately, this problem extends to other markets beyond that of Americans and their homes. This issue is having a serve impact on business and their ability to pay rent during a time when most have been told to shut their doors to help perpetuate social distancing.
According to The Certified Commercial Investment Institute website (ccim.com), here are their predictions as to the effects COVID-19 will have on the retail, hospitality, Office, Industrial and Multifamily markets.
Retail: Retail will see a bifurcated reaction to this economic downturn. Storefronts selling consumer staples - like Walmart, CVS, and grocery stores-will thrive, while dine-in restaurants, for example, could remain closed for the foreseeable future.
Hospitality: Unsurprisingly, hospitality has been decimated by the national response to the pandemic. CCIM Institute Chief Economist K.C. Conway recommends those in the sector ask themselves some basic questions. “For those that own hospitality assets and invest in that space, you need to step back and reflect on what brought you to that property type. Why? Where were you going into this particular period? The market had near record revenues per available room, average daily occupancy, and rental rates. … Whether I'm a hospitality REIT, hotel owner, or I've got properties, I want to negotiate with my lenders for some debt restructuring.”
Office: The office leasing market is likely to suffer in the short-term due to COVID-19 as layoffs diminish tenants' overall need for space and, in many cases, set aside expansion plans they may have had. In addition, tenants who remain in the market for additional space will have a difficult time touring properties. Office workers' pushback against the open office environment is likely to accelerate, as illness is more easily transmitted in an open environment. Many employers already had recognized that in a competition to attract and retain top talent, squeezing workers into increasingly tight spaces was not a sustainable strategy. Now, an emphasis on social distancing and good health practices - continuing in some fashion even after the crisis has passed - may help reverse the densification trend, with less shared space and fewer workers per leased square foot.
Multifamily: Similarly, the multifamily sector could see significant upheavals as unemployment rises. Business that are closed employ people who now will struggle to pay rent. It's a similar situation to retail, only in this case the tenant is an individual or family who lost its source of income. Tellingly, Freddie Mac announced a nationwide relief plan for current multifamily borrowers and residents.
Industrial: Industrial, meanwhile, is in a two-pronged situation similar to the retail sector. Grocery and medical items, for instance, are flying off the shelves, so properties in this supply chain are humming along. But other industrial sectors could be in store for tough times, depending on what areas of the national economy slow or stop.
When the dust settles, business re-open and millions of Americans return to work it’s hard to tell what the state of the market will be. As for now, it seems everyone is doing their best to deal with the hand we’ve been dealt.
Source:
ccim.com [Article] https://www.ccim.com/cre-tenant-landlord-guidance/