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The deserted sidewalks and continuous rows of boarded-window establishments along both sides of the street create a stark, unprecedented and surreal scene as I drive along 6th Street in Downtown Austin.
Though this is a temporary situation, it’s not one from which we will effortlessly rebound. I’m forced to reflect on how we’ll redefine development as usual to make us more adaptable and resilient in the face of economic disaster.
It’s serious. The deepening economic impact of the coronavirus pandemic is felt worldwide. But it’s not just the economic effects of the pandemic that will force new ways of doing business in the real estate development and investment sector; social change is apparent and inevitable. It is pushing us to learn to cope with and embrace a new professional and personal landscape.
Despite the chaos that’s taking hold in the broader market, investors and developers can apply brave but smart strategies to keep their projects going and assets producing.
The Situation
If you watch or read the news with any frequency, you’ll likely conclude that the situation is less than favorable (a better word choice than “grim,” given our collective morale).
The economic KPIs are dynamic at this point. Indeed, we’ve already reached record levels of unemployment applications, with more than 700,000 jobs cut in March and joblessness nationwide at 4.4% and rising.
Mandated nonessential-business closures and stay-at-home orders have put a hold on businesses domestically and around the world. The influence on the housing and commercial real estate market is quickly becoming visible as tenants and landlords struggle to service their lease payments and mortgages.
On The Buy Side
Investors who have been biding their time between recessions will now find the opportunity to acquire a portfolio at scale.
In both the commercial and residential sectors, we’ll soon see an onslaught of motivated sellers as they cope with disappearing incomes and unpaid expenses. Sales volume is dropping as inventory levels creep higher. Once home and rental owners come to the tough point of choosing to sell their properties to stay liquid, the volume, inventory and depreciation issues will take hold.
What starts with movie theater and restaurant staff getting laid off and missing April 1’s rent payment inevitably carries forward to lost rent and mortgage proceeds by residential and commercial property owners and noteholders.
The recent Fed funds rate cuts, now in the 0.0%-0.25% range, will help buyers and the overall economy by lowering the cost of financing. However, there is doubt that the cuts will have much of a benefit for commercial real estate because development financing is typically figured on the 10-year Treasury, which most recently increased by 0.25%.
Firms and accredited investors with capital are positioned to buy assets at lower-than-market values and take a favorable bargaining spot as inventories rise and it becomes a buyer’s market. Though it may evoke images of vultures (not uncommon on Texas byways), the sale of underperforming assets is what’s needed to achieve equilibrium in the market.
Stay in touch with your broker, attorney and network to keep the line out for undervalued deals as they come along, and keep your underutilized capital liquid. The effect of the pandemic is still new, and it may be a few weeks or months before the crisis shows its toll.
On The Operations And Development Side
This adapting market will be more challenging for developers and landlords. We’re set to see significant struggles as rental incomes are disrupted due to widespread business closures, the shift toward remote work and the loss of business and personal incomes.
What can you do to get through this period?
If you’re struggling financially as a result of the crisis, you have some options available. For most construction and development firms with less than 500 employees or $39.5 million in annual revenue, financing is available through the Small Business Administration in the form of the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL). You can learn more about these and other programs directly from the SBA.
Aside from the relief provided by the CARES Act, there are some practical business strategies you can implement to make the best of the down market:
• Request payment forbearance with your lenders until your tenants can catch up.
• Move toward centralized or off-site management where possible to cut costs.
• Utilize SaaS solutions for property management to protect staff and reduce expenses.
• Put a renewed focus on your marketing to keep up demand and your brand position.
• Adapt your messaging and properties to meet the needs of professionals working remotely.
• Place an emphasis on making acquisitions below market value with value-add potential.
• Sell assets that aren’t performing, or that are not anticipated to add value to your portfolio. Cut losses and sell at a discount if you’re already losing money, and reinvest liquid capital in better opportunities.
Continuing Demand
The health crisis and its human toll are nothing but adverse; however, for the real estate industry, the consequences are mixed.
If you’re economically impacted (who isn’t?), take action soon because it will take time to optimize your operations, and SBA financing is capped and mired in administrative delays.
Individuals and businesses will still need places to live and operate. Accordingly, continue to focus on building your investments — if you’re not moving forward, you’re sliding back, especially during recessionary times.