COVID-19 Hit Brick-And-Mortar Retail Hard But One SoCal Company Looks To Capitalize
Of all the commercial real estate sectors, retail has arguably been hit the hardest since the onset of the coronavirus in the U.S. in late January. The retail sector was already suffering from the "retail apocalypse" with many shoppers opting to shop online rather than visiting physical stores. In some ways, the COVID-19 pandemic has just accelerated brick-and-mortar’s demise.
Almost exactly one year ago, Dillavou announced that his company would invest $500M in retail properties in 2020 and 2021. The timing may have changed, but he still intends to acquire more retail properties in the next couple of years.
"We are more bullish now than before," Dillavou told Bisnow after speaking on a Bisnow webinar Tuesday. "Our core business is investing, repositioning, adding value and hopefully, fixing the older retail centers. And while the so-called 'retail apocalypse' was a slow drip of dying retailers, the pandemic will expedite the elimination of the weak retailers that were trying to hang on which, in turn, expedites the repositioning opportunities."
Paragon hopes to capture some of those opportunities.
"Since we have the ability to continue to acquire centers on an all-cash basis, we believe that this market reset will benefit our acquisition pipeline in the coming 12 to 24 months."
Dillavou was one of two guest speakers at Bisnow's webinar on how COVID-19 is impacting the Los Angeles retail and multifamily market. MJW Investments founder and President Mark Weinstein also spoke on the webinar.
During the 40-minute discussion, the two Los Angeles commercial real estate veterans talked about the current state of the multifamily, student housing and retail markets; the political scene; and how they are negotiating rent with their tenants during this global pandemic.
Weinstein said one of his biggest concerns is the political landscape. Landlords and property owners are perceived as one of the villains of this whole pandemic, he said. Many people think landlords are demanding rent and want to kick tenants out. But property owners have to pay a mortgage, workers and vendors that service their properties, Weinstein said.
"We are part of an ecosystem."
Weinstein urged property owners to talk to their local elected officials.
"One of the legislators told me [they] are hearing from the 'I don't want to pay rent' people [but they are] not hearing from the owners and other stakeholders."
Weinstein said property owners aren't doing a very good job of getting their message across.
Weinstein said he is working with his multifamily and student housing tenants that have been directly or indirectly affected by COVID-19.
Some retail landlords have taken a hard stance, demanding rent from their tenants. Dillavou has taken the opposite approach.
For the past three days, Dillavou, whose company operates about 30 retail shopping centers across California, has spoken to more than 80 tenants that occupy his properties. Many of those business owners are struggling due to the global coronavirus pandemic that has forced them to either close shop or limit their operating hours.
Rather than forcefully demanding rent, Dillavou is communicating and working with them and wants to help see them through this challenging ordeal.
Dillavou said about 50% of his retail tenants have asked for some type of rent concession.
"We have tried to be fair with folks and give them 30, 60 to 90 days of rent deferral in exchange for them repaying us over 12 months when they open back up again," Dillavou said, adding that this is a fluid and ongoing negotiation.
"I keep telling them I'm going to be flexible about it as long as you're flexible with me."
Dillavou said there is no general playbook when dealing with retail tenants. He said he has spent the past three weeks speaking with other landlords, and found there is no one unified approach when it comes to talking to tenants.
Some are demanding tenants pay their monthly rent in full and going through the legal channel while others are negotiating and working with tenants.
Paragon Commercial, Dillavou said, has gone the latter route.
"I’ve spoken with 80 tenants in the past three days, I have 30 of them crying to me on the phone because they don’t know how they are going to feed their families in the next six months," Dillavou said. "That’s what bothers me. It’s made me a lot more compassionate."
Dillavou added that the only way to get through this crisis is by working together. There is no use forcing tenants to pay rent they don't have.
"I don't know what is gained by trying to strong-arm a tenant into paying full rent if I know they can't afford it," Dillavou said. "In our view, now is the time to solve problems and be creative, not to add insult to injury."
"This is a very unique situation in that there is no ‘bad guy’ or ‘good guy.’ The only way out of this is together. "I don’t mean to sound cliche by that but our view, from a retail standpoint, is we’d rather have our tenants with us."