We are living in unprecedented times. The impact of the COVID-19 pandemic has extended its reach deep into our daily lives. Obviously, our own health and the health of our loved ones is the biggest risk and source of unease, to put it mildly. But we are seeing the effects seep into our economy, resulting in a profound upset of the commercial real estate market.
Overview
The commercial real estate market is getting pummeled by the coronavirus, and it’s likely to get worse before it gets better. Areas hit hardest include restaurants and bars, something we have witnessed first hand here in Portland. Now, with the shelter-in-place order enacted, retail businesses deemed non-essential are now forced to shutter their doors, as well.
Other effects include supply chains for building and development. Necessary materials for construction are less available, due to workers having to stay home, business shutdowns, quarantines and curfews. Add in the layoffs and applications for unemployment, and suddenly the economy faces anemia sending us into a recession.
Rental/Apartment Industry
Landlords are now faced with tenants who are unable to pay their rent, due to layoffs and lost income. Many cities are putting a freeze on evictions, and here in Portland, Multnomah County has enacted a moratorium for the duration of the emergency declaration. More information on Multnomah County’s moratorium can be found here.
Many Portland renters have requested a rent freeze, with the hopes that rent prices won’t be increased and that they won’t be liable for the rental payments they weren’t able to make while under economic duress. They feel that the eviction freeze is not enough protection. However, Mayor Ted Wheeler explained that the city cannot legally impose a residential rent freeze, due to Oregon law. Therefore, residents are required to pay back their rent obligation within 6 months after the government’s declaration of emergency has expired. More about this can be read here.
Another issue landlords face is the domino effect that will ultimately ensue. If tenants cannot afford to pay their rent, then that results in lost income for landlords and property owners to pay their mortgages with. Thankfully, the Federal Housing Finance Agency said on Monday, March 23, that Fannie Mae and Freddie Mac will grant mortgage forbearance to owners of multifamily properties, in exchange for suspending evictions. This forbearance applies to all Fannie Mae and Freddie Mac-backed mortgages, which constitutes about $5 trillion worth of mortgages.
Landlords are also responsible for the safety of their tenants in their buildings. Owners and managers of multi-family properties are encouraged to keep public areas clean and sanitized, even though they cannot control the cleanliness of an individual’s unit. Additionally, owners should have a pandemic illness disaster plan, which includes information on how to deal with a building outbreak.
What can property owners do?
Property owners are encouraged to research the FHFA forbearance first and foremost. Below are links to that information as well as other sources of support:
FHFA Forbearance info: https://www.fhfa.gov/Homeownersbuyer/MortgageAssistance/Pages/Coronavirus-Assistance-Information.aspx
General Resources: https://www.irem.org/learning/coronavirus
Tenant Safety: https://www.avail.co/education/articles/coronavirus-what-landlords-and-building-owners-need-to-know
Retail/Hospitality
Impacts on retail and hospitality are obvious in the near term, considering restaurants and stores deemed non-essential are forced to shutter. Even restaurants doing delivery are unable to generate anything close to their normal revenue. In Portland, institutions such as Powells’ Books and the McMenamin’s chain have closed, hopefully temporarily, laying off thousands of workers.
Similarly to residential landlords, retail landlords are faced with a flood of requests for rent relief, as well. In fact, chains such as Subway and Mattress Firm are calling for rent reductions through lease amendments. The Federal Reserve may also give banks leeway to defer mortgage payments, and retailers may be able to declare a “force majeure,” which is a contract clause that covers highly unusual events. If retailers are able to do so, then landlords could then make that case to insurers. Regardless, these rent disputes will be flooding courts for the foreseeable future.
Some landlords that rent to local retail and restaurant tenants are allowing rent to defer and waiving fees to help alleviate the strain on these businesses.
The long term impacts on the retail sector are less obvious. The hope is that once the virus runs its course, that the sector will snap back. However, in Portland, the question is are the smaller retailers resilient enough, and able to get enough assistance, to be able to reopen once this pandemic passes.
Some local business owners are preparing for the fact that they may not reopen, particularly the mom and pop shops, such as small gallery or studio spaces. The domino effect is incredibly obvious and painful. Not only are these retailers responsible for rent for their retail space, but they also have housing rents or mortgages to pay, so the burden of this crisis is twofold for them, at minimum.
Information on the economic effects Portland has experienced thus far can be found here.
Stimulus package
Unfortunately, the $2 trillion relief package passed on Friday, March 27 offers little support for the real estate industry, or even for renters. In expensive housing markets, a one-time payment of $1200 to a renter may cover one month’s worth of rent, which offers limited support for landlords and renters alike.
According to Craig L. Price, a transactional attorney with Belkin Burden Goldman, LLP, the coronavirus relief package is “wholly insufficient and incomplete.”
First, considering April 1 is less than a week away, many in the industry fear that rent checks won’t show up. It’s highly unlikely that any sort of relief check will reach the hands of Americans in that short amount of time. Additionally, there are concerns about people who are undocumented, only get paid in cash or work in the gig economy and cannot drive their Uber.
Provisions in the proposed bill that include expanded unemployment benefits and loans for small businesses that maintain their payrolls could ease pressure on some renters. These types of benefits have little effect on businesses that have already shut their doors for the duration of the pandemic.
Landlords whose mortgages are backed by federal agencies will see some relief, but the overall consensus is that renters, both residential and retail, need enough money to pay their rent, and the current stimulus isn’t significant enough to handle that.
Action steps
So what can be done to weather the storm ahead?
Here are some steps that the Colorado Apartment Association has recommended for landlords:
- Create payment plans for residents who can’t pay rent due to virus-related loss of income.
- Waive all late fees through April 30.
- Refrain from enforcing eviction orders through April 30.
- Avoid rent increases.
- To take proper social distancing measures, limit entry to rental properties to only emergency maintenance.
- Follow HIPAA rules for resident/employee privacy if someone who lives in or works in a complex tests positive for COVID-19.
- Increase cleaning in common areas.
- Maintain emergency maintenance for renters.
Landlords are advised to look into FHFA information about Fannie and Freddie-backed loans, to see if they qualify for mortgage forbearance.
Renters should look into their rental insurance policy to see what can be covered, and communicate directly with your landlord or property manager to develop a payment plan. Reach out to renters associations for support and information, as well, such as those linked above.
For other renters, such as retailers, the most important steps to take would be to check your insurance policies for any “Force Majeure” clauses that could be of assistance, and communicate with your landlord as directly as possible to explore options, such as repayment plans. Reach out to small business associations and any other small business advocacies for support.
No doubt we are living in scary times, with new pressures put on us individually, societally and economically. Information changes daily, and so it’s increasingly important for us to stay apprised of it, and share accurate information. The future is unknown, but we can all come together to support each other, as individuals and businesses. Please comment below if you have additional resources to share, or suggestions for those affected.
Additional resources:
https://www.nreionline.com/coronavirus-covid-19
https://therealdeal.com/2020/03/25/massive-stimulus-package-has-limited-upside-for-real-estate/
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