Businesses and residential tenants may have trouble paying rent, and sadly, many retailers won’t be able to sustain the effects of the pandemic. But there's good news for investors in all this.
The novel coronavirus has rocked economies across the globe. Stay-at-home orders have affected businesses and millions of Americans’ jobs, with projections that the unemployment rate could be nearing the 15% mark — the highest level since 1940. For real estate investors and landlords this has a very real impact — businesses and residential tenants may have trouble paying rent, and sadly, many retailers won’t be able to sustain the effects of the pandemic.
Effects on Commercial Property
Changes in work style
Those who previously commuted to an office everyday have been asked to work remotely. With many companies realizing their employees can complete their jobs at home — and employees enjoying doing so — it may change the future of the office job. Now that they have seen remote working in action, businesses may be looking to reduce overhead by limiting those who physically come into the office. This may be especially true for companies that have suffered a loss as the economy tanked.
Discounted properties available
There’s good news for investors in all this. Owners who may have been collecting only a portion of rents due to their tenants lost sales may be ready to sell. There could be a fire sale on commercial properties. But, snatching up these retail and office spaces doesn’t come without risk. It may take months — or years — for the tenants you inherit in the sale to regain financial stability. You should be prepared for not all tenants to be able to pay the full amount of rent for some time or be willing to evict them.
Communication is key
For current commercial property managers and owners, be proactive. Put together a plan with your tenants, but make sure you have your lawyer involved and get everything in writing. It is also a good idea to review your existing loan documents — some lenders require that you get their permission prior to amending leases. You would be prudent to review a tenant’s financial statements in order to prove the need for rent relief. You may also wish to draw up an amendment in which the tenant agrees to abide by guidelines from the Center for Disease Control (CDC) and indemnifying yourself from liability related to COVID-19 in connection with the premises or tenant’s use.
Effects on Residential Property
Increase in foreclosures
As many homeowners lose their jobs, are furloughed, or experience a reduction of hours for several months, they may be unable to pay their mortgage payments and dip into savings. Considering the amount of underfunded emergency savings in the United States, these homeowners may find themselves in foreclosure. For investors, this provides an opportunity to find great discounts on properties.
Tenants may be unable to pay rent
According to previous research by Clever, Americans were already $14 trillion in debt before COVID-19 swept across the nation. On March 31, 2020, Clever surveyed 1000 Americans and found that almost half of renters surveyed had less than $500 saved for emergencies prior to the pandemic. Half never had an emergency fund to begin with or have already spent it, leaving them concerned about how they will pay rent in the near future.
While some protections — like a moratorium on evictions — are offered via the recently passed CARES Act, they generally only cover properties that carry a federal mortgage (think Fannie Mae, Freddie Mac, or FHA). This covers about 12% of single-family rental properties and about half of all multifamily properties. However, the protections aren’t simple — they’re laid out in a 350-page document — and can be tricky to apply. It may be difficult for renters to know what type of mortgage their landlords hold and if the moratorium applies.
Work with tenants
As landlords, you will be best served by working with your tenants. This is an unprecedented circumstance and your tenants may be stretched too thin through no fault of their own. While they may have been able to float a month or so of no income because of savings or their federal stimulus check, things may begin to get more dire.
You can help your tenants by pointing them in the direction of available resources, like unemployment or other relief. As a last resort, you may consider offering a payment plan — if they can only pay half of next month’s rent, divide the shortfall by the remaining number of months on their lease. Be sure to put everything in writing if you make any changes or addendums to the lease.
Strategize your next move
If you’re carrying too much debt on your investment properties and lack of rent coming in is making things too stressful, you might consider offloading some of your properties to increase your cash on hand. Cash is king during a recession, so you can weather the storm without being forced to sell (or foreclose) properties in your portfolio.
Consider selling your properties with the least amount of cashflow and listing with a discount real estate agent to keep more of your profit. Some experts expect the market to temporarily slow down, which would be an opportunity for investors looking for deals, so offloading property now could yield success.
Of course, property owners will want to crunch the numbers with a rental property calculator to make sure selling is the right move. You’ll want to hold onto property that’s recession proof, i.e., property where you aren’t experiencing vacancies or rent freezes during the pandemic.