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Covid-19 and Commercial Real Estate

Authored by: Pete Davisson, SIOR, CCIM

An event such as the one we are all experiencing, right now, is certainly precedent setting. Nothing like this has ever happened before, so many new or different ideas will be tested. Almost all aspects of the commercial real estate industry have been or will be touched.

The pro-active measure of the Federal Reserve Bank, reducing their lending rate to almost zero percent, will be very helpful for all, but the parties involved – lenders – landlords – tenants will have to do their homework and be active themselves to see just how they might use the bank’s move to their benefit. At first blush, if the Fed reduced their rate, that should mean that the banks that lend to commercial borrowers will have lower rates on the money that they borrow from the Fed. Investors and developers should then have lower rates on the dollars they borrow from the bank, which should ease their financial obligations at least a little so they can give some relief to the tenants that occupy their hospitality facilities, retail centers, office buildings and senior housing projects, the areas of commercial real estate which we think will be hit the hardest.

It should be pretty easy to see and understand why hotels, restaurants, shopping centers and office buildings will feel the pinch the most because they are the industries hit most directly by the “stay at home” edict coming out of Washington, DC  and the offices of Governors and Mayors around the country. Airlines are reportedly ‘off’ by as much as 80%. If you are respecting and following the requests to stay at home, you are not using any one of these aspects of commercial real estate, as restaurants, shopping centers and office buildings are closed.

Interestingly enough however, it seems that there might not be a level playing field for all of these industries. First of all, not all states have made ‘stay at home’ edicts. And, even in states with stay at home announcements, not all types of business are considered the same ‘essential’. In the middle Atlantic states at least, only one of the states, Pennsylvania, has shut down the construction industry. In some states gun shops and liquor stores are still open, and doing a brisk business. Liquor sales are up over 50% nationally.

Restaurants and retail stores will be the hardest hit, and many of the small business owners may never recover. If employees are staying at home, and able to work at home, office tenants might not experience the drastic hit to their production and ultimate revenues that the others will, so they might be able to pay their office rents. Some areas of the ‘office’ industry will do better than others. The healthcare industry, for example, will likely continue to work, it is after all, essential to our well-being.

The Landlords in all of these areas of the economy will be getting requests for some rent relief, either a reduction of their rent or a total forgiveness of the rent. Many of the banks have already announced that they will not evict or otherwise force tenants into default. No one wins if they do that. These areas should be able to recover if they are able to keep their respective businesses alive, by simply pushing the rent back 90 or 120 days, but we don’t know yet just how long this will go on.

Lenders servicing the multi-family segment of the marketplace are going to feel the short-term pinch of deferred mortgage and rent payments, but the consumer will likely come back to apartments and condos as soon as the pandemic ends.

There will be some ‘testing’ of the system because some tenants will not be able to pay their rent obligation at all if their businesses actually fail. They will want to get out of their lease obligation all together. Do they have ‘Force Majeure’ language in their lease? Does this Act of God or the event that they have no control over meet the definition of Force Majeure? I have read opinion letters from good attorneys on both sides of that question. I am sure there will be many checks being written to attorneys arguing their position for their clients.

Jackson Cross Partners, myself, Lou and John, have a combined 100 + years in brokerage representing Landlords and Tenants, Buyers and Sellers, Owners and Occupiers providing Brokerage and Advisory services. Sixteen years later, we now have over fifty employees, including 14 full time lawyers providing Lease Administration Services and Strategic Planning for corporate clients with locations around the world. If we can help you with any questions you might have or services you might need, please call or email us.

There is still some time in front of us before this comes to an end, but we will survive. Especially, if we stay in touch, watch over our friends and neighbors, both business and personal, do whatever we can do related to our jobs. Those things will be good for us mentally, physically and emotionally. As professional practitioners in this wonderful world of commercial real estate, we want to be part of the solution. Stay the course. Stay active, happy and healthy!

Authored by Founding Partner, Pete Davisson, SIOR, CCIM