The corona-virus and the economic chaos ensuing from a nationwide lock-down forcing businesses to close across a wide variety of industries is wreaking havoc across most commercial real estate niches. Office and retail (brick and mortar) will get hit particularly hard as folks can’t leave their home.
Normal safe havens during a recession like multi-family apartments will still be tested. Although “folks have to live somewhere” concept is comforting in normal times, unemployment claims are going to be the most we’ve seen in our lifetimes. It’s just hard to predict how many of our residents are one paycheck away from homelessness.
Here are 5 tips from operators we work with on what they are doing and how they are preparing for fallout from significant economic shock expected to hit renters and their ability to pay.
1) Communications with Residents Emphasizing Safety
- Work with the property management team and ensure clear communications are happening on the ground to protect the health and safety of renters.
- Cancel socials onsite; post social distancing policies.
- Ensure residents are aware of the CDC and local recommendations.
- Be empathetic and compassionate to those impacted by health and income loss.
2) Prepare Investors
- Increase communications – this might be bi-weekly from monthly or monthly from quarterly.
- Detail preparations and action plans to preserve capital and their investment.
- It would be prudent to message that distributions may be stopped or reduced ahead of the tsunami as most deals have a preferred return catch up over the life of the project.
3) Build Cash Reserves
- Stop renovations or significantly reduce based on current demand.
- Delay all unnecessary operational expenses during crisis like routine maintenance orders.
- Halt or delay all capital expenditures that are not required.
- Stop or reduce distributions. Best before the tsunami hits.
4) Keep Occupancy Up
- Offer any renter whose lease is coming up in the next three months annual renewal now at no increase in rent.
- Contact any renter who has signed a notice to leave the same deal above.
- Take credit card for those who are compromised at no fee.
- Waive fees for late or partial payments.
- Limit but allow some deferral payments program on a case by case basis (not advertised).
- Ensure you track all conversations with any renter on any program above. With no eviction rules being enforced in many cities we need to be careful all conversations are documented about why someone can’t pay or partial pay (job loss, health loss, reduced pay, etc.).
5) Understand Lender Programs, Government Initiatives and Local Restrictions
- Start discussions with lenders on your options such as potential forbearance of existing loan with a goal of at least 3 months of no P&I, tack onto back end of loan.
- If possible, with lower rates, see if refinancing is available to lower holding costs.
- Understand other government assistance programs in stimulus packages so you can know what renters might receive (unemployment, direct payments, duration, etc.).
- Be aware of local restrictions around evictions during this time.
- Update underwriting model with reduced cash flow expectations.
- Revise stress test and sensitivity models.
Preparation is key. Ensure clear and frequent communications with property management company (renters), investors and support organization (lenders, government programs). Learn what’s available, what you can and can’t do and get ahead of the curve as much as possible. Keep occupancy high, get creative and have empathy for those affected. Cash is king now so get ahead of the curve. It’s difficult to anticipate how many folks will be impacted, but these measures taken broadly should help you get through what looks like a brutal Q2 ahead.