As this letter went to press, about a third of the global population – spanning approximately 30 countries – was reportedly under full or partial coronavirus lockdown, shutting down businesses and keeping residents at home in those jurisdictions. The impact of the lockdowns – the majority of which went to into effect only in the past 30 days – has been devastating for the many commercial real estate tenants that can no longer operate and generate revenue and the many residential tenants who have now lost their jobs as a result of those shutdowns.
Unsurprisingly, numerous tenants have been defaulting on their first post-lockdown rent payments as they came due. Stanley Iezman, chairman and chief executive of US real estate investment manager American Realty Advisors, told us this week that more than 50 percent of his tenant base has been subject to shutdowns, with 15-20 percent having submitted force majeure notices that they will not be paying their next month’s rent.
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Many landlords have been sharing in the pain, with two-thirds of managers reporting that they have provided rent relief to tenants, according to a member survey conducted last week by industry association NAREIM. The firms said they were evaluating requests on a case-by-case basis, but that in approved cases they had granted two to three months’ relief, recovering the costs by extending the lease terms or amortizing the abated rent over a set period.
Tenants and landlords only represent one link in the chain of real estate relationships, however, as tenant defaults in turn increase the prospect of borrower defaults with lenders. Recently enacted government stimulus programs around the globe, therefore, will lend a lifeline to real estate occupiers and owners alike.
Measures specifically aimed at tenants and landlords include the US Coronavirus Aid, Relief, and Economic Security Act, which contains provisions to allow tenants to obtain loans with the Small Business Administration to cover rental obligations and to also enforce eviction moratoriums for tenants and foreclosure moratoriums for owners of multifamily buildings secured by federally backed mortgage loans.
The UK Coronavirus Act 2020 offers eviction protection for business and residential tenants, while the country’s Financial Conduct Authority has issued new guidance for lenders participating in the Coronavirus Business Interruption Loan Scheme to grant borrowers payment holidays for three months if they are having difficulties making loan payments as a result of covid-19.
The Australian government, meanwhile, has introduced measures to aid affected commercial tenants, including a six-month eviction moratorium and waived or reduced rental payments. The country also has made legislative changes to impede creditors from issuing statutory demands on debtors during the covid-19 crisis.
Make no mistake: there will most certainly be casualties in private real estate. Many businesses, particularly those in retail and hospitality, are not expected to reopen when the lockdowns are finally lifted, and many owners, facing disappearing cashflows, are not likely to be able to hold onto their properties.
The hope, however, is that the combined relief efforts will still help many other tenants and landlords to stay afloat and weather the crisis. Much like a spike in new covid-19 infections has overwhelmed healthcare systems around the world, a sudden surge of occupier and owner bankruptcies would similarly be disastrous for private real estate. If the coronavirus stimulus plans ultimately prove successful, they will play a major part in flattening the curve of potential distress in the industry.
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