Along with the tragic human cost of the COVID-19 pandemic, the economic consequences have been well-documented with its impact felt sharply across the country. It is near-impossible to think of an industry not changed by this crisis. The hardships faced by individuals and small business owners have had downstream effects on those areas of the economy they support, namely commercial real estate. The significant downturn (or full stop) in traditional retail patronage is driving a vicious cycle in which commercial real estate owners and operates feel much of the burden; either as a result of shelter-in-place orders, loss of income for consumer purchases, or the fear of exposure to the virus.
CRE owners and operators are between a rock and a hard place – rent may be short, late, or simply not there, but eviction moratoriums aimed at ameliorating the economic brunt of the pandemic prevents them from taking possession of their units. Worse yet, a pandemic is not an ideal time to sign a lease, either for a new business or expansion, flattening demand for commercial spaces. Of course, a drop in anticipated rental rates should be anticipated.
Although COVID-19 has caused widespread economic pain, it is critical to understand that this is, first and foremost, a crisis of public health. It is highly unlikely the present restrictions will be lifted based on economic pressure, for the most part. A “flattening of the curve” as it relates to new cases and deaths is what will ultimately determine the course of government responses to the crisis. This is important as you continue to make plans for your firm’s future operations in the aftermath of the crisis. Being overly optimistic can be problematic in such an unpredictable situation since this crisis, perhaps more than any other economic crisis, is largely out of your hands. How you can respond or mitigate losses is largely outside of your purview and at the hands of local, state, and federal politicians. While this creates a difficult situation for your firm, keeping up to date on developments in policy responses will be essential to your firm’s success through the end of this crisis.
CARES Act Relief
The massive $2.2 trillion CARES Act stimulus bill passed by Congress and signed into law by the President on March 27th promised to provide the much-needed relief to working Americans and businesses across the United States. Just the unemployment provide cause for action; in a 6-week period in March and April, approximately 30 million Americans filed for unemployment benefits. The most notorious provision in the bill is the Economic Impact Payments, which provide “$1,200 per adult for individuals whose income was less than $99,000 (or $198,000 for joint filers) and $500 per child under 17 years old – or up to $3,400 for a family of four.” The Economic Impact Payment, in addition to the unemployment benefits, should help Americans pay the bills they may have otherwise fallen behind on (or already done so) and hopefully, strengthen consumer demand as well. This would provide an assist to businesses, who are struggling to pay their own bills now, including rent to their commercial landlords. Although the stimulus check may play a role in strengthening demand, demand will still be depressed in the short-term as this crisis continues, meaning that commercial real estate firms continue to be at risk of not receiving their rent payments.
The more important provision in the CARES Act for commercial real estate firms is the Paycheck Protection Program (PPP), which “provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.” Initially pumped with $349 billion, the fund had to be replenished with another $320 billion after it was drained with so many requests for cash, a testament to what small businesses are experiencing right now. This can benefit your firm on multiple fronts, since you may be able to apply for one of these forgive loans from the PPP program to pay your own bills, and the fund can give your tenants the funds necessary to make their rent payments to your firm. By the time you get a chance to apply for the program, though, the funds may once again be barren. The overall goal of the stimulus package is to galvanize the economy and make strides toward erasing the losses the stock market has experienced so far, so there may be downstream benefits to your firm from a more active economy. Still, the cloud of long-term uncertainty still hangs over the economy as states and localities prepare to send employees back to work and re-open businesses.
Tempering Expectations with “Opening Up America Again”
Politicians have increasingly been discussing and even implementing the re-opening of certain areas of the economy as frustration with the crisis grows. One critical aspect of the re-opening that should be noted is that it will be very decentralized, since federal policymakers do not have the power to force states to send employees back to work or open restaurants, for example. On April 16th, the White House released a blueprint for “Opening Up America Again,” which includes 3 different phases that describe at which point certain employees can return to work and certain businesses can return to normal functioning. A few states have already begun their re-opening process and many others have announced plans to do so. While the various state plans will depend on how severe the spread is within their states, the existence of federal guidance is still indispensable to how these states will structure their policies.
The talk of opening up the American economy has been spoken with much uncertainty and anxiety. Not only is there uncertainty surrounding when this re-opening will occur and what that necessarily entails, the reality is that no one truly knows if demand will rise very much after the restrictions are lifted. This depends on whether Americans feel safe going about their normal business. If Americans do not feel confident about the public health apparatus in their area, they will not patronize businesses the way they once did, and your tenants will likely continue to suffer the effects of depressed demand. As such, it is important to keep your expectations in check, even as the situation is turning the corner and calls for some optimism. The COVID-19 crisis will not be solved until a vaccine or effective treatment arises and strengthens public confidence of the health system.
Conclusion
The economic situation remains grim at this moment, but tempered optimism is called for as our nation begins what will inevitably be a long process in emerging from this crisis. In all of this, what we do know is that we can control little in this moment, and that may lead to existential questions for individuals and businesses. Still, the best remedy in this situation is to prepare, prepare, prepare. As the country “normalizes,” constantly acclimating your firm to the changing economic conditions will be essential to your success. Being aware of your options and being proactive can be the difference between keeping your portfolio afloat and letting it sink.
References:
1 https://www.usatoday.com/story/money/2020/04/30/unemployment benefits-3-8-million-file-jobless-claims-amid-pandemic/3046759001/
2 https://home.treasury.gov/policy-issues/cares/assistance-for-american-workers-and-families
3 https://home.treasury.gov/policy-issues/cares/assistance-for-small businesses
Ryan Fishman
Fishman Group, P.C.
Ryan J. Fishman is the managing partner at Fishman Group, P.C. The firm represents the owners and operators of commercial and industrial properties across the United States. They have succeeded in making the recovery of accounts receivable a profitable endeavor for more than four decades. Today, they use automation technology partnered with the experience of their attorneys and staff to seamlessly integrate with their clients; manage compliance in multiple jurisdictions; and collect for their clients. For more information, visit www.thefishmangroup.com or call (248) 353-4600.
Featured in Harrisburg Commercial Real Estate Report – May 2020