'There's No Bailout For Landlords': What To Expect As Anxious April Begins
The rent is due today.
For the tenants and property owners tied to trillions of dollars of commercial real estate properties in the U.S., what happens on April 1 is no joke this year.
Retailers have been closed or their businesses are deeply battered. Companies across sectors have been forced to carry out layoffs or furlough staff, while others have been directly impacted by a virus that has afflicted more than 170,000 Americans to date.
Millions of Americans are already jobless, worried about paying the rent today. And the virus is weeks away from its peak, health experts warn.
Coronavirus is the common, existential threat to tenants, property managers and owners alike at this moment — and all parties are asking the same question today: What happens now?
Bisnow spoke to dozens of owners and managers of multifamily, retail, office and industrial real estate about what they will do when a tenant can’t pay — or, as some fear, can but won’t.
This is a snapshot of what today’s deadline looks like across the country. As COVID-19 cases and deaths rise sharply and the second quarter begins, landlords are split on how to approach their tenants, but they are nearly unanimous that many will struggle to pay.
“We made the assumption, just worst-case scenario, that we’re not going to get any rent between April and August,” said Leslie Lundin, a principal at LBG Real Estate Cos., which owns 2.2M SF of retail on the West Coast. “We’re not saying that’s going to happen, but you’ve got to run the numbers somehow and start somewhere.”
National groups like the National Multifamily Housing Council and the Institute of Real Estate Management have issued guidance and provided resources, like where evictions and mortgage payments are suspended and how to apply for loans through the new stimulus package. But commercial property owners are largely making decisions on their own.
“Unfortunately, it really will come down to each individual property owner ... and knowing what their ability is to work with their tenants,” IREM President Cheryl Gray said. “No landlord will be taking a hard line in this scenario.”
With the global economy plummeting into a recession at unprecedented speed, Michael McLean, a partner at Chicago-based developer Condor Partners, hopes the U.S. doesn’t see a repeat of what happened in the Great Recession’s aftermath.
“It got cutthroat really quickly,” he said.
This time around, the problems faced by all players in the market are so extraordinary, the industry needs a spirit of cooperation, with everyone from landlords, tenants and lenders all feeling the pain the pandemic has wrought on the economy.
“It’s an unprecedented time, and there is no real plan for it,” McLean said. “But in general we hope there can be a live-and-let-live kind of approach.”
A New Lesson From Across The Pond: UK Rent Collection
The real estate industry can look to the UK for an early insight into what is in store for U.S. landlords today. In the UK, rents are paid quarterly in advance, on fixed dates known as quarter days. And the March 25 quarter day was bleak.
Brokerage firm Knight Frank estimated that just 33% of retail and food and beverage tenants in the UK paid their rent on time, and the majority asked for some sort of concession, such as a switch to monthly payments or rent holidays, typically for three or six months.
In a post-quarter-day report, it said there was a lack of communication between tenants and landlords.
“There was absolutely no dialogue at all between some retail operators and landlords — the former did not pay, but did not provide formal instruction of their intentions,” the Knight Frank report says.
Shopping center REIT Intu said just 29% of its tenants paid their rent on time, compared to 77% at the same point last year. For its shopping center peer, Hammerson, the figure was 37%.
“We have received a variety of requests for rent deferrals, monthly payments and waivers, which we are reviewing on a case-by-case basis, taking into account the business model and risk profile of the occupier, alongside the aid made available by the relevant governments,” Hammerson said in a regulatory statement.
NewRiver Retail, which focuses on smaller, community shopping centers, said it collected 60% of its quarterly rents, while for Capital & Regional, which has a similar focus, the figure was 50%.
Given the rush to the supermarkets by shoppers worried about food shortages during the government-enforced lockdown, it may be no surprise Supermarket Income REIT was able to collect 100% of its quarterly rent.
Multifamily: ‘Assuming The Worst’
Norman Radow, the CEO of Atlanta-based RADCO Cos., said up to half the residents of his 12,000 apartment units likely won't be paying their April rent.
“I am predicting 50% delinquency. There's no science, there's no model ... for this in any historical context in our industry,” Radow said. “I'm just assuming the worst.”
Instead of a “knee-jerk” reaction by each of his property managers, Radow put together a committee to collect and respond to all requests for rental assistance and abatement as a result of COVID-19 job or income losses. He said he will address them individually: a cut in rents, no rental payments or helping usher residents to various organizations that can help, including programs just established by the $2 trillion economic rescue package passed in Congress last week.
“Everybody has a different story, and I think we need to be flexible to understand that. We can't have a black-and-white answer to a problem no one has faced before,” Radow said. “We're going to liken it to a children's coloring book. All the lines are there, but we're going to color it in as we get the crayon.”
Some owners have more blanket policies on rent forgiveness, abatement or a lack thereof. The Irvine Co. owns 125 multifamily properties totaling 60,000 units, has a broad company mandate to give its tenants flexibility.
Its apartment renters who are unable to pay rent due to health or financial hardship can pay 50% for April and May, according to a letter to tenants obtained by Bisnow. Impacted renters would then have to pay back the remaining balance over a six-month period, interest-free.
Universe Holdings Chairman and CEO Henry Manoucheri’s biggest concern is those trying to game the current situation. California has banned evictions for 60 days to protect renters possibly impacted by the coronavirus.
Universe Holdings has 60 multifamily properties with more than 3,000 units across Southern California. He said he understands the current situation and the toll it may have taken on his renters. But he said he has neither time nor tolerance for those who may not have been impacted that think that the next couple of months will be rent-free.
“We’re asking for a doctor’s note, an employer’s note, pay stubs and bank statements, we’re looking for actual proof,” Manoucheri said. “If this is a legitimate reason for sympathy, we can work it out. But we have no tolerance for people that want to play games.”
Martin Ditto, a boutique apartment developer in D.C., said federal housing laws and industry association guidelines don’t offer much flexibility on allowing some tenants to not pay rent. But because local governments have put a pause on evictions and late fees, he said some tenants who are unable to pay on the first of the month can make that decision.
“The lease is the lease,” Ditto said. ”If you have needs around that, for some of them we’ve been helping them find a roommate or move to a different building that’s less expensive.”
Because his company, Ditto Residential, only rents to about 200 tenants, Ditto said his team has had the ability to reach out to each of the renters to have one-on-one conversations about their situation and ways the landlord can help. Ditto said his company is creating a platform to connect its apartment residents, giving them the opportunity to help each other with daily tasks like picking up groceries or walking the dog.
“Our focus has been on individuals,” Ditto said. “We need to rethink how we’re managing people in buildings. What that means is talking to people about what their needs are, staying within the confines of fair housing and HUD, while still doing what we can.”
He emailed his state senator Monday night and explained his concerns about a piece of New York state legislation that would excuse both rent and mortgage payments until the coronavirus crisis ends.
A staffer responded and emphasized that under the legislation, landlords would not pay mortgages, property taxes or water and sewage bills, Latsko said. But for Latsko, it is more complicated than that.
“It’s not really that equitable,” he said. “[Profit from rent] is not profit to build a swimming pool or go to mimosa brunches every day… It’s what we live off of. That’s how we buy groceries, put gas in the car, pay health insurance and even if housing debts are excused for a while … What do I tell my health insurance company?”
Office And Industrial: ‘Rent Is Due On The First, And It’s Late On The Second’
A Dallas-area developer who owns office properties with major international tenants said so far, no tenants have asked him for rent abatements or reductions, but he’s certain those questions are coming soon. The developer requested anonymity to discuss sensitive internal business strategy.
“I have not been asked,” the developer said. “If so, I would reduce [rent] 50%, and for every day of 50%, I would make them extend the lease term by 200% at market with no additional [tenant improvement allowances] or [leasing commissions].”
While he’s open to helping tenants, the developer said he would want to know what other potential relief they have in place before making big changes.
“With $5-to-$7 trillion of government help, I would want to know how much are they going to receive?” he said. “What is the true loss? It may not be a loss, so we really don’t know.”
When it comes to the capital side of the markets, developers and landlords see more chaos coming before the storm clears.
“Lenders are already expecting countless defaults and are notifying their borrowers en masse to collect whatever rent they can,” the developer said.
Some landlords said certain things won’t change, even in an escalating economic crisis.
“I’ll keep it simple,” Brennan Investment Group Chairman Michael Brennan said. “I don’t have a strategy, I have a philosophy, and that’s that the rent is due on the first, and it’s late on the second.”
Brennan’s Rosemont, Illinois-based firm acquires and develops industrial projects, such as the new $1B Elk Grove Technology Park near Chicago’s O’Hare International Airport, and has about 800 tenants in a 46M SF portfolio. Renting to this group gives the company an advantage over landlords with retail and office tenants, most of which are more vulnerable to government shutdown orders.
“The majority of our tenants are essential infrastructure and essential businesses, so they are still operating,” Brennan said.
The federal government’s $2 trillion economic aid package, which set aside $350B for loans and grants to small businesses, should rescue tenants hit hard by the disaster, he said.
“Tenants would do themselves a great service by looking into that because this industry by and large can’t afford to finance tenant obligations,” Brennan said.
Retail: ‘We Are On The Same Boat As The Tenant’
Primestor Development CEO Arturo Sneider describes the coronavirus crisis with one word: madness.
For the past week or so, Sneider, whose company owns and manages shopping centers totaling 3.5M SF across four states, has fielded calls from tenants ranging from mom-and-pop small businesses to national credit tenants, with some openly stating that they wouldn’t pay rent.
Though it is a difficult time, he said he reminds them of their contractual obligations, tries to work with them and hopes they can understand his situation. He didn’t go into details when pressed, only saying his company’s negotiations with retail tenants are happening on a case-by-case basis.
“We’re not saying no. We’re not saying yes,” Sneider said. “Let’s understand the issue. Let’s be proactive and quick in our analysis and response. But we ask you to be transparent and communicative with us.”
Sneider said he is handcuffed. While local and state politicians have openly expressed efforts to protect multifamily and commercial tenants from evictions, there has been no such widespread reprieve for landlords, many of whom could fall behind on mortgage payments or lose their properties to their lenders.
“We are taking the position that we are on the same boat as the tenant,” Sneider said. “We have to share with [the bank] information that we can get through this, if we all work together.”
The Irvine Co., which has a portfolio of more than 40 retail centers, told its retail tenants they will not be charged rent for the next 90 days starting April 1, and the deferred rent would be paid back over a 12-month period with no interest starting Jan. 1, 2021.
Vulcan Real Estate, which was founded by the late Paul Allen, is not collecting rent from its small business and nonprofit tenants for April.
“As a long-standing Seattle-based developer, we are part of the community that is navigating this extraordinarily difficult time,” Vulcan Chief Real Estate Officer Ada Healey said. “We hope this action will help these small businesses weather the next phase of the COVID-19 health and economic crisis.”
Tricera Capital owns retail properties across Florida, and leases to a lot of boutique, mom-and-pop operators.
“They’re feeling it,” Tricera co-founder and managing principal Scott Sherman said. “It’s personal to them. Our goal is to see all of them survive this and come out the other side hopefully even stronger.”
Some may be eligible for government assistance to weather the storm. He said Tricera would be much better off helping businesses stay open than to have vacancies and half-dark buildings. He said Tricera was brainstorming ideas like virtual classes or make-pizza-at-home kits that might help tenants at least keep the lights on.
“We’re not expecting a lot of them to pay,” Sherman said. “For the most part, we’ll give them a deferment option for April, give them breathing room to come up with plans.”
LBG’s approach with tenants lands between leniency and a hard line. One of its 100 or so retail tenants first has to ask for relief — something LBG can predict fairly well ahead of time thanks to thorough prelease due diligence on tenants, said Lundin, a principal at the retail investment company. They then must present evidence of dire straits in the form of tax returns and operating statements.
Tenants also must show they’ve sought Small Business Administration loans and other new government programs being offered as part of the economic aid package Congress passed last week. In the last few weeks, LBG has designated a company specialist in helping tenants apply for federal assistance.
Those qualifying will be exempt from base rent for now, just having to pay common area maintenance expenses, Lundin said. But not everyone is qualified.
An LBG tenant that initially requested rent relief and was asked for documentation then rescinded its request, and at least one other has been denied, he said. While Lundin said she wants to ensure his tenants are still operating when society returns to normal, she said she has to be pragmatic.
“There’s no bailout for landlords,” she said.
Ethan Rothstein, Joseph Pimentel, Jarred Schenke, Kerri Panchuk, Dean Boerner, Jon Banister, Kelsey Neubauer, Brian Rogal, Shawna De La Rosa, Mike Phillips, David Thame, Miriam Hall, Dees Stribling, Kelcey McClung, Deirdra Funcheon and Mark F. Bonner contributed to this story.