What CRE Has On Its Wish List For The Next Coronavirus Stimulus Package
Sixteen days after Congress passed the sweeping stimulus bill known as the Coronavirus Aid, Relief And Economic Security Act, the key business relief provision in that bill has already exhausted its money.
But even before the Paycheck Protection Program dried up Thursday, members of Congress were already debating a potential second stimulus bill to keep the American economy afloat throughout the pandemic and widespread shelter-in-place orders, which have been extended into May in many cities.
This time, real estate groups say Congress should give more consideration to the industry that puts roofs over the heads of renters, creates destinations for restaurants and stores and houses the armies of corporate workers who will one day soon — hopefully — be returning.
“The commercial real estate industry has been sort of getting stuck in the middle. Landlords are basically not collecting all their rent from tenants even though tenants are getting checks in the mail. The rent check is sort of the last on the list,” CenterSquare Investment Management Chief Investment Officer Scott Crowe said.
“If we keep going down this path, one of the unintended consequences … is you'll bankrupt a lot of commercial real estate owners.”
While governments are pushing for different timetables to reopen the economy, the pandemic is worsening economic conditions at a rapid pace, with jobless claims topping 20 million over the last month. The U.S. economy is expected to contract by at least 15% in the second quarter, with some predictions falling into more dire territories.
Mounting job losses or furloughs, shuttered businesses and companies hoarding as much cash as possible are having ripple effects into commercial real estate, especially as landlords of all product types tally up the tenants who can't pay rent — and cajole those who can into paying it.
Numerous commercial real estate organizations have been lobbying Congress with ideas it should tackle in its next major stimulus package — or just legislation in general — that would plug the holes in commercial real estate's rickety-seeming boat, including sweeping forbearance requirements, new pools of money that renters, banks and bondholders can dip into and new tax abatements.
“I think we're all looking for the silver bullet, but it's going to take a lot of bullets,” National Multifamily Housing Council Vice President Kevin Donnelly said.
Here are five platforms real estate groups and leaders are pushing for:
Nationally Subsidized Rent
Housing rents for those economically affected by the pandemic should be covered for a period of time until the economy can revive and jobs return, landlord groups told Bisnow.
“The reason it's so important to us [is because] it's sort of the foundational event that keeps everything else in commercial real estate stable,” National Apartment Association Senior Vice President Greg Brown said.
Aside from expanding the timelines and funding of the CARES Acts benefit, including expanding unemployment benefits beyond July, rental assistance would go far toward preventing delinquencies from worsening.
“[You've] got to be thinking about having the unemployment benefits and the $600 [a week] additional payment last beyond July, otherwise people will start to have it really hit their pocketbooks, and we'll have a really ugly August and September,” Walker said. “If this downturn goes beyond a financial recession and closer to a depression, one of the things you don't want is for the housing market to get unglued.”
The CARES Act forbade rental housing landlords who are using HUD loans or other federal financing tools to evict renters for 90 days. Even after the 90 days, landlords are required to give renters a 30-day notice before evictions can commence. At the same time, many municipalities are placing their own eviction moratoriums.
But the CARES Act failed to address private mortgage lenders or bondholders of mortgage-backed securities, who may be less patient with landlords who can't meet their loan terms of loans or pay debt services on time.
“Many landlords are going to be unable to meet debt service payments in the face of decreasing collections and no end in sight,” New York-based Current Real Estate Advisors co-founder Adam Henick said. “This is an intertwined business.”
Donnelly said the NMHC is seeking to require lenders to offer loan forbearance, even private loans and CMBS financing, at least as long as moratoriums are in place, a sentiment echoed by the NAA.
“The forbearance should be 120 days if the moratorium is 120 days,” Brown said.
The changes should also account for construction loans, especially given shelter-in-place orders have halted and delayed many construction projects across the country, Built Technologies Director Jim Fraser said.
For some developers, these delays could put them in jeopardy of loan covenants on construction timelines. And borrowers asking for forbearance can trigger banks and lenders to classify the loan as troubled debt, prompting additional capital costs, Fraser said.
Fraser also hopes Congress will mandate lengthening the times for pro forma stabilization. Even after the economy opens again, it is likely going to take much longer for developers to achieve leasing and rent goals they had set before the pandemic.
“If we're tolerant in that period, loans won't necessarily become bank-owned,” Fraser said. “That extension will drive liquidity.”
But not everyone was sold on a form of blanket forbearance. Henick said he worried that developers and landlords could use it just to kick the can down the road on troubles that were already brewing.
And Walker said the ripple effects of forbearance could be too much to control the fallout elsewhere in the economy. After all, bonds have covenants and expected payments are used by everyone from investors to insurance companies to help with payouts and pension companies that need to pay retirees.
“There's a balance of payments here that just get completely messed up if you do [broad forbearance],” Walker said. “Think about the number of mortgage-backed securities out there bondholders are expecting payments from. The whole system would shut down.”
Property Tax Waivers
Others are pushing for property tax waivers at local and federal levels to give landlords some breathing room when it comes to their non-mortgage expenses. Crowe, the CIO for private equity real estate investor CenterSquare, said Singapore successfully implemented a similar program.
“They basically waived property taxes. Some kind of relief there would be very helpful,” he said. “[Governments] have a very real and quick and easy way to [give] relief, and that's waiving tax for a quarter.”
Business groups are starting to form to ask for the same, including in D.C., where developers have asked for reprieves from business taxes despite expected government funding shortfalls.
Donnelly said landlords should also get a reprieve for a term against any kind of negative action from lenders, such as liens.
“We do believe there should be some kind of financial protection for owners,” he said.
Fund And Expand The PPP
Another popular ask by some real estate organizations and executives would be to allow commercial real estate to benefit from the Paycheck Protection Program established by the CARES Act. That program allowed the Small Business Administration to give forgivable loans of up to $10M to companies with fewer than 500 employees to cover payroll and keep people employed.
The program, which was allotted $350B in the CARES Act, ran out of money Thursday morning. Although more than 25% of its funding went to real estate, retail and construction companies, "passive" real estate businesses, like owners, investors and developers, weren't allowed to participate.
Numerous real estate organizations, including the Real Estate Roundtable, are calling for the SBA or Congress to allow commercial real estate companies to partake in the PPP. RER also is asking that the Treasury and SBA withdraw their requirements that businesses can only use up to 25% of the PPP loan proceeds for non-payroll expenses, such as rent and utility payments.
“Businesses should be left to decide how they best want to use PPP loans — as long as proceeds are devoted to statutory 'allowable uses,'” RER officials wrote.
New Credit Facility For Mortgage Servicers
A wide swath of industry organizations also is calling on Congress, the Treasury Department and the Federal Reserve to jointly establish a new facility to provide liquidity to mortgage servicers, both on the commercial and residential housing sides. It’s a provision that some members of Congress have already expressed interest in, Mortgage Bankers Association Senior Vice President Mike Flood said.
“The nice part is Congress is saying, 'This is our intent.' But codifying it into law is never a bad thing,” Flood said.
By establishing the facility, the government would prevent mortgage forbearance for homeowners and multifamily landlords from mucking up the financial system by violating loan covenants. It would also allow mortgage servicers to pay bondholders on time.
Congress is widely expected to pass further stimulus funding as broad sections of the economy appear set to stay shut down into the summer. And many acknowledge that CRE is just one industry out there seeking help during the pandemic.
"I think CARES 2 is certainly necessary. We're feeling pretty confident that Congress ... [is] likely going to take a few steps in the short term that we have a shot in," Donnelly said. “With unemployment numbers of what we have seen and with rental payments and the stresses we've seen ... We think housing has a very big part to play in that."