Where are we? and Where are we going?
Since the Pandemic turned the investment world upside down for the individual investor,
Cash flows have been threatened, and uncertainty abounds. Valuations have taken a tumble.
People are asking “What do I do now?
We have seen hotel occupancies fall as much as 90%. Many have reduced staff to shore up cash flow until the economy turns around. The country is waiting for a vaccine so the public will feel comfortable traveling, eating out, and congregating again. As a result, hotel valuations have fallen precipitously.
Multi Family valuations have fallen. While occupancy remains high, the economic vacancy has climbed as high as 50%. Tenants are still in their apartments but because of job layoffs and closures, they are not able to pay rent. The government has placed a moratorium on residential evictions. Economic stress on Landlords has increased due to more people staying inside and working from home. This has caused contract services to increase. There is no relief from Real Estate taxes due or utility payments.
Shopping Centers have lost tenants. Some will never reopen. Some have requested and received forbearance reducing the cash flow to Landlords. This has created a cash flow squeeze.
Reduced real estate assessments will not be realized until 2021 since the Pandemic began after January 1st, the date of assessment. This has caused landlords to become delinquent on their mortgage payments.
Restaurants have been hard hit especially sit down. While Carry-Out restaurants have fared better, they are operating at breakeven or below. Some will not be able to reopen.
How can Landlords (borrowers) work through these issues?
In real estate lending, there are generally two types of lenders: Recourse and Non-recourse
Recourse lending is generally what is originated by Banks. You borrow money and you sign personally. The real estate is collateralized by a Deed of Trust and the personal assets of the borrower. In times of distress, like the Pandemic, lenders generally will work to reduce payments and extend loan terms so the Borrow can weather the financial storm.
Secondly, there are non-recourse lenders. One type is Collateralized Mortgage-Backed Securities (“CMBS”). While banks originate the loans, they are not held on their balance sheets. Instead, they are converted to bonds that are sold on Wall Street through a secondary market.
If the borrower is unable to pay, he can turn in the keys and walk away, and his personal assets cannot be attached. He will lose his down payment made to acquire the property and all moneys held in his reserve accounts. This could be very sizable. Most large real estate projects are financed in this way. But in times of financial stress like the Pandemic, bondholders are unwilling to timely respond to requests for forbearance. If and when they do agree, it may be too late. Because of this delay, borrowers will have no choice but to walk away.
As we look forward what do we see over the Horizon?
Capital Funds for real estate acquisitions are growing to purchase troubled Hospitality and Multi-Family assets. They are looking to purchase based on the current net operating income (‘NOI’). Some of these values have plummeted over 80% during the pandemic. If the new buyers can hang on and reposition the assets, they can create a windfall profit.
Certain real estate types will vanish. Some because of the Amazon effect, and some because of the Pandemic.
Office: Expect office to continue, but you will have fewer people per square foot of office space. Many will telecommute reducing the amount of space required.
Retail: Change from conventional retail to medical, experiential, and high profile office.
Hospitality: Less travel means lower occupancy
Restaurant: Sit down restaurants will be slow to come back if at all. Many people will do carry out.
One thing is sure, the effects of the Pandemic will last far longer even when we have a cure and have the virus contained. The business will change forever.