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COVID-19 Roils Commercial Real Estate Market


Apr 14, 2020 by Marc Rapport

The coronavirus pandemic has wreaked havoc on Americans' health and on their businesses. April 1 marked the first major due date for rent for millions of enterprises large and small, and reports from around the nation show that many simply couldn't make do.

Unlike the morbid updates from Johns Hopkins University, there's no daily body count of lost businesses, but reports of unpaid April rent have popped up around the country, along with accounts of how landlords and tenants are dealing with the sudden collapse of a huge chunk of the American economy.

The news reports recount the good, the bad, and the opportunistic -- including tenants reportedly seeking help they may not need and landlords taking advantage of the situation to run off long-term tenants in favor of new businesses with deeper pockets and expansion plans.

But, most of all, they paint a picture of a commercial real estate industry in turmoil, with businesses large and small feeling the pinch that has become a punch that some uber-prominent investors, like Carl Icahn, say could lay the economy low like the Great Recession of 2008.

A pandemic-driven domino effect

Icahn, in fact, told CNBC that his biggest play right now is shorting the commercial bond market, the end of the money line for a lot of payments that begin with retail shops and then go to property owners, then to servicers and lenders, and then to the mortgage bond market.

The same article quoted Taubman Centers (NYSE: TCO), a real estate investment trust (REIT) and major owner of U.S. malls, from a letter the company sent its own tenants stating it has bills of its own, including utilities and mortgages.

"The rental income that we receive from tenants is essential in order to meet these obligations," Taubman said in telling its tenants that the rent must be paid.

Indeed, that domino effect is buttressing investing tactics like Icahn's optimism in shorting the market amidst reports that big-name companies like the Cheesecake Factory (NASDAQ: CAKE), Subway, and Mattress Firm (NASDAQ: MFRM) did not pay their April rent. That represents hundreds if not thousands of store locations across the country.

The Staples office supplies chain is also among that number, although Axios reports many of its stores remain open in a number of locations because it's considered an essential business immune to virus-driven shutdown orders. And, the Axios report says, the chain's private equity owner is not offering to alleviate the situation with compromises or workouts.

Let's work things out

That's in contrast to the experience of many smaller landlords and tenants pulling together, including in Memphis, Tennessee, where, according to the Daily Memphian, many commercial landlords are telling their tenants to skip their rent for the next month or so and amortize that amount, at zero percent, for a year or until the end of the lease term.

Similar reports come from St. Augustine, Florida, where a major landlord, Publix (OTCMKTS: PUSH) grocery stores, is among those extending a hand to smaller stores in its shopping centers that have been shut down by the crisis. The relief includes not paying rent or fees on common maintenance areas for a couple of months, according to The St. Augustine Record.

Of course, not all relationships are so convivial. This report in the Bangor Daily News describes the struggles between very small businesses and a major property owner in downtown Portland, Maine, who may see opportunity where there was none.

On the other side of the coin is this observation in The Real Deal from Prologis (NYSE: PLD) chief investment officer Gene Reilly, in an analysts call on April 6, who said, of the surge in requests for rent relief from tenants: "We have received several opportunistic relief requests from large, financially sound customers."

Prologis, a $60 billion real estate trust with 964 million square feet under management around the world, said it has received more than 94% of April's rent. The company said about a quarter of its tenants are asking for an average of 69 days in rent relief and that about a quarter of those requests will be granted, according to coverage of the analysts' call.

The bottom line

There are multiple government and private business efforts in place to help suddenly strapped businesses weather the plague, most prominently the Paycheck Protection Program now ramping up through the U.S. Small Business Administration.

That money, in the form of loans that many expect to turn into grants, is only beginning to be distributed, and 75% of each forgivable loan must go to payroll. That leaves only 25% at most to go to rent.

St. Augustine businessman John Arbizzani, owner of eight restaurants and other properties in the historic coastal town, told the local newspaper he was waiting to see what state and federal action would be before he took any of his own.

"We're also here to work with our customers. We may find a way to work with our customers to meet in the middle, maybe with a rent deferral," Arbizzani said in the April 5 St. Augustine Record article.

"The duration of this is what is going to be most difficult for all of us," the Florida businessman said.

The American commercial real estate market, like the economy it helps support, is a complex web of financial and other business and personal relationships that is being tested now like never before. How much it will fray and how much it will fail, or stand, will become more clear as the weeks and months unfold.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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