The lid has been blown off the CRE Pandora’s Box. The tsunami of threats to our business is quite overwhelming. But for others, there are going to be opportunities. Let’s look at property underwriting and messaging during this time:
- Current underwriting vs. updated underwriting for all property financing in place. All budgets, 10-year cashflows and other assumptions prior to the crisis unleashed by COVID-19 must be adjusted, since these impact loans’ ability to perform going forward for the next 10 years. The impacts will be felt across all property sectors to varying degrees.
- Retail. Starbucks is asking for 1 year’s relief, while it is surviving this storm. Although Starbucks is not a typical retail tenant, it occupies space in both office buildings and more traditional retail venues. Its footprint in the US is significant. If it needs a year to adjust, it’s one measuring stick for the market. We are beginning to see other, more traditional retailers declaring bankruptcy as their response to current market forces.
- Office. Many articles are being written about tenants’ reduced ability to pay or survive in this pandemic. Additionally, employers have discovered their tenants may wish to reduce office footprints when employees do return to work. Few landlords want to lose viable tenants during this crisis … so what to do? As a start, owners and their agents must determine the breadth of their exposure, and then formulate plans for how to work with tenants, as well as how to work with their own lenders.
- Multifamily. The impact of residential tenants not being able to pay for their apartments is lamented across the news throughout the country. It is likely to be followed by a similar crisis of in the mortgage business, with homeowners who have lost their jobs, and thus, the ability to pay their mortgages, especially if they have little or no savings. None of these occurrences have been self-inflicted; rather the precarious nature of the economy has had a global epidemic effect. How to handle? State and regional governments have tried to slow down the effect by halting evictions, but many of these “grace” periods are coming to an end. Individual landlords and owners should determine on a case by case basis how to work through these events with their tenants. Given the globality of the crisis, there aren’t necessarily backup tenants in waiting, as might have been the case in previous times. It makes sense to work with tenants already in place if at all possible. Multifamily property owners must also work with their lenders.
- Developing and delivering clear messages to affected parties. While we’re mired in the swamp of a lot of “bad news,” our best messaging is firmly rooted in honesty about where we are, and also in humanizing our messages – even when we don’t have all the answers today. We are in this together. We’re not alone. We’re dealing in good faith efforts to solve real problems. And we’re going to survive and come out the other side likely with innovative tools, technologies, skills and comrades, to conduct business in our new normal.
- Opportunities. Many investors are gearing up for a new round of buying opportunities. As reported in the New York Times and elsewhere, investors are amassing tremendous amounts of capital to redeploy when the time is right to acquire new assets. For the properly positioned investors, new opportunities will arise. They will need to be ready to act.
Susan and Deb
From our “Conversations About CRE” Series … an ongoing consideration of all things CRE with colleagues passionate about what’s happening now, and how we can help each other through this!
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The authors of this article have been employed by the following in their tour of corporate CRE: Smithy Braedon, The Oliver Carr Company, Real Estate Recovery, The Kaempfer Company, Lowe Enterprises, Trammell Crow Company, CBRE, Cushman & Wakefield and WeWork. Links to more detailed info about us are presented below.
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