As Rent Comes Due, Landlords and Tenants Have Decisions to Make
Coronavirus Pandemic Forces Difficult Conversations
With rent and other bills coming due April 1, some small-business tenants affected by the coronavirus are facing tough decisions regarding whether to work out extension terms with their landlords, or simply fold their tents and move out because the business is beyond rescuing.
Businesses across the United States are watching as Congress hashes out the terms of what could be the biggest economic stimulus in U.S. history to stave off a recession or potentially worse impacts from the pandemic. But with widespread business closings, layoffs and population isolation, many businesses and their commercial landlords have some pressing deadlines when it comes to their own short- and long-term survival.
"It may be one policy or it may be more coming from the federal government, but landlords and tenants are going to want some sense of direction as to how they should make these kinds of long-term decisions," Brad Tisdahl, CEO of real estate consulting firm Tenant Risk Assessment in New York City, told CoStar News.
The new coronavirus began quickly spreading across the United States in the past two weeks, forcing businesses to close and people to stay inside, as cities and states quickly began urging and ordering isolation measures to try to stop the virus' spread. In a matter of days last week, revenue dropped dramatically for many industries, the stock market began plummeting and economic projections dove as uncertainty about the future and when social-distancing measures may end took hold.
Now, many in the real estate industry are watching for signs in how businesses and their landlords deal with the bills coming due April 1.
"The people I've been in contact with are asking, how long and how serious is this going to get," said Tishahl, adding he's recently received a steady stream of inquiries from current and prospective clients. "Landlords want to get a sense of what they should be doing if they're getting a lot of rent-relief requests."
Some major commercial landlords are evaluating whether it pays to work out terms with struggling tenants or just cut losses and search for replacement renters in a tough market, knowing their own lenders are breathing down their necks for their monthly mortgage payments.
Among those already taking proactive steps to head off tenant departures is Newport Beach, California-based Irvine Co., among the state's largest office and retail property owners. The firm this week offered tenants at its Southern California retail centers the option of postponing rent for 90 days, effective April 1. Money that's still owed after that point can be paid back over 12 months, interest free, starting Jan. 1. Similar payment-extension plans were detailed in letters sent by Irvine Co. to its California apartment residents, though details were not immediately available on plans for its office tenants.
Some business owners say that may be the kind of help smaller businesses need, instead of assistance by lowering interest rates, printing more money or even handing checks out to individual consumers.
"Lower interest rates are not going to help that much," Rob Dissman, principal at Pyramid Logistics in Westminster, California, recently told CoStar News "It’s not going to help me if I need to take out a loan to pay my bills."
Dissman's equipment transport company has been hit from multiple directions since the coronavirus began its global spread. It has cut off work from clients that have kept his company busy for the past 23 years, shipping equipment to conventions and trade shows, transporting sets to major Hollywood movie studios and hauling promotional displays between sports venues and retail centers, among other tasks.
His two leased warehouse facilities in California and Las Vegas have become hushed in recent weeks, after the company posted one of its best months ever in January, and he's now contemplating layoffs beyond the 13 of his 60-worker company already let go. Like other business operators, he's asking for time more than anything else.
"What would help is if people had some kind of temporary holiday on paying the expenses they already have," Dissman said. "If a landlord can get a break on paying the mortgage on his warehouse, maybe that landlord can give a tenant a break on paying rent."
Tisdhal, whose company helps prominent nationwide commercial property owners and developers evaluate the financial state of current and prospective tenants as part of due diligence, said landlords in coming weeks must make a steady stream of assessments about their tenants.
Decisions Looming
Decision time may arrive first for office property owners handling ground-floor retail tenants that have been devastated by the nationwide emptying of office buildings in favor of at-home working, as cities promote social distancing and seek to prevent the spread of the already devastating coronavirus pandemic.
Especially if they are independent operators and not part of national chains, it could take several months for some of those tenants, including coffee shops, cafes, convenience stores, barbershops and other service providers, to get back to normal revenue streams.
Landlords may have the most incentive to work out extended payment terms with certain tenants that help other tenants in the same building draw in symbiotic foot traffic, or certain service providers who give the property owner a competitive edge over neighboring buildings.
"Maybe there's a really popular commercial gym in the building, and a juice bar right next to it," Tisdahl said. "They're separately owned, and maybe your office tenants have let it be known that they don't want to lose them."
Also in the calculation: Some of these businesses may be so damaged that they might not survive the next month or two, and it will be best for landlords to just let them close up shop and make way for replacements who are in better financial shape.
Much will depend on how long the tenant still has left on its lease. If there are a lot of years left, the landlord may need to extract some kind of early-departure penalty, especially if that property owner is facing a long back-fill period for that space.
Tisdahl said some tenants may have done improvements that are so specific to their needs that the landlord could face costly renovations to prepare the space for the next tenant, and those costs may need to be amortized going forward.
Further complications could be faced by tenants and landlords who had already taken on high levels of business debt before the coronavirus hit. The outcomes of these property negotiations could decide whether the nation sees a new wave of business bankruptcies and commercial property foreclosures, similar to what happened during the Great Recession.
The U.S. commercial mortgage delinquency rate — loans more than 90 days past due, excluding loans on farmland — reached a peak of 8.76% in the second quarter of 2010, two years into the recession, according to data from the U.S. Federal Reserve System. But by the fourth quarter of 2019, that rate had dropped to just 0.67%
Douglas Wilson, CEO of San Diego-based Douglas Wilson Cos., has been handling property-distress issues nationwide on behalf of courts, law firms and lenders for the past 30 years, in many cases managing or disposing of properties in transition as part of receiverships and bankruptcies through several regional U.S. offices.
Wilson said hotels and other hospitality-related companies are in the first wave of struggles tied to coronavirus-related business shutdowns. But it's too early to tell whether the burdens fall equally on tenants, landlords and their lenders in other segments, including office, industrial, retail and multifamily.
"The landlords will still want to work out something with tenants to get those payments over time," Wilson told CoStar News. "They're not going to want to evict tenants, and then have to find new tenants at a time when a lot of businesses are just not looking to sign new leases anywhere."
One worst-case scenario, which last occurred in the throes of the Great Recession in some U.S. cities, is over-leveraged property owners simply walking away from loans and handing the keys over to their lenders.
"The lenders want to protect their collateral, most importantly," said Wilson, adding he's also been getting inquiries from law firms, lenders and others who could be dealing with these issues in coming months.
"This is not something that's going to be resolved in just the next few weeks," Wilson said. "It's going to be felt very much for the rest of this year and possibly into early next year, but nobody has a crystal ball."
The immediate task facing government officials is preventing the coronavirus business fallout from spreading upward from tenants to landlords, and ultimately the property lenders.
"All of this has become a global political issue, and in the end, it's going to take political solutions to answer some of these questions," Tisdahl said.
By Lou Hirsch CoStar News March 26, 2020
