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Right now in the real estate world, we are witnessing what could be the “black swan” event that could quite possibly make an all-new paradigm come forward. In response to the far-reaching impact of the coronavirus, I believe real estate is going to go through a major rethink, as nobody could have predicted the crisis we are experiencing today.
Globalization has shown us what just-in-time manufacturing can do for a company, and now we will see what a pandemic can do to it. Consider the sidelined employees: Will they remain sidelined or employees? In our search for maximum profit, many of us thought the trend toward outsourcing vital manufacturing was a good idea to foster links to tie the knot of global trade tighter. Our supply lines are not of the just-in-time variety at the moment. A small problem with a parts supplier is not an isolated problem of the company that needs the parts, but also all associated with its use in the product made. No part means no sale, which in many cases means no paycheck.
A host of concerns crop up here. Just because there is a work stoppage, there is not a bill stoppage — or is there? Many municipalities are telling tenants and landlords that there is a freeze on both commercial and residential evictions. The same forbearance will be needed by the banks. If a property owner’s tenant may not be able to pay with cause, the effects will cascade. Conversations about density, co-living and mobility all have to be rethought. Liabilities associated with owning and operating real property just got more complicated. A very big question will be how much is anything worth.
With the instruction of social distancing comes numerous (and currently unanswerable) questions for various players in the real estate industry and adjacent arenas: building owners, co-living properties, micro-housing developers, retail owners and more. I believe we are going to see the value, usage and desire for real property go through a rework unseen in modern times.
This rework will entail getting our heads around our current issue. Later, property owners will need to review how space was utilized during the crisis and before. Were things workable from a technical standpoint outside the leased office dynamic or other business-related property? If so, we must learn how to adjust for unneeded space. I have already had clients call me regarding letters they received from tenants asking for reductions or abatements to their rent. These happen to be major tenants of the triple-net lease variety. The same questions will arise with furloughed employees. I operate a private money lending business and have had a capital source say they are no longer lending where there is a foreclosure moratorium. This is at the banks’ and lenders’ front doors.
I believe the government will have to give a tacit guarantee of a majority of the real estate-related debts and tenancies for a period of time that’s yet to be determined. In any event, the Fed and the government will have to do a lot of heavy lifting and reassuring to the public.
For real estate owners, the best thing to do right now is be very mindful of all proposals coming forth and understand your current position. Know what may affect the value of your property after things subside.
Considerations must include:
• Liability amidst a pandemic: Here, you will need to consult your attorney or seek a referral to one versed in this area of law.
• How will any stimulus given to tenants be accorded to reflect abated or unpaid rent to the landlord? The same question applies to the mortgage holder and borrower. How to manage such a cash crunch is a question for all. Can tenant deposits be used to offset rent not paid? Speak with your legal team and gauge the mood of your tenants.
• How will business interruption insurance apply in this case? Will it? Call your insurance agent to find out.
• Will force majeure be used to terminate leases or other contracts? Review your active leases for exposure.
• Will the government impose orders that will impact your property? Since land is finite, you need to take keen note of any good deed that can affect your private property rights. Call your brokers and gauge their feelings. If a taking is on the table, how will value be established? Plug into your cities of interest and hear the discussions.
• If you have to reposition your property, what would be the highest and best use?
We are in flux right now. We will learn from this, but for now, I think we should keep a vigilant eye toward the real estate-owning future and the value therein.