Never in the last 150 years of American history have commercial properties in the United States been closed for as long as they have now.
Once the stay-at-home orders began to take hold in March, the demand for real estate and hotels began to subside drastically, and in some cases, more than 90% of all staff were furloughed. It’s not just the hospitality industry that has been affected, as commercial properties from small-town malls to office skyscrapers have been hit hard as well.
In this article, we’ll discuss the devastation that COVID-19 has had on commercial real estate and the commercial mortgage-backed securities market, the impact it has had for investors who are now bracing for losses, and how business owners stuck in the middle now face the prospect of handing the keys over to their lenders.
How Has COVID Impacted Commercial Property And Lenders?
While the full extent of the damage created by COVID cannot yet be fully assessed, there’s no question that it has delivered the biggest hit to the American economy since the Great Depression. Credit card spending has tanked by 40% since the virus hit, and personal incomes have fallen considerably too.
The government responded with a number of initiatives designed to boost the economy, including slashing interest rates to record lows. The expectation has been mortgage lenders would create or refinance loans to match these low rates, but in reality, this has not happened. On the contrary, the gap between rates in the commercial market and rates set by the U.S. Treasury has widened greatly. This is because several lenders have actually raised their rates under fears that the economic recession will be extended. Subsequently, commercial loan volume has decreased substantially.
For instance, Fannie Mae and Freddie Mac, the two largest mortgage loan companies for apartment loans, have cut back their lending volume significantly and have entirely discounted commercial or retail properties due to the large volume of store closures.
The retail sector has also been hard hit, as many retail businesses are only just now reopening and many have closed their doors for good. Retail landlords have attempted to forgive or delay rent payments to their tenants, but this doesn’t help as lenders are then asked to refinance loans.
But it’s the hospitality sector that has been hit the hardest of all. The average hotel is seeing occupancy rates of just 38%, and many Americans are canceling or postponing their travel plans.
Amidst all of this, we simply can’t help but wonder: what are business owners supposed to do now that many of them face the strong prospect of handing the keys over to their lenders?
What Can Business Owners Do To Survive?
Commercial businesses must learn how to adapt to COVID-19 if they are to survive, and that starts with considering a wide range of different scenarios and preparing for each one. Do you anticipate the worst being over in two to three months, or do you expect consumer demand to continue decreasing? Your contingency plan ultimately needs to prepare for both scenarios.
The next thing that many commercial businesses will need to do is restructure the loans secured by their properties if they want to avoid a default or foreclosure. Remember, commercial real estate is a leveraged business, meaning that borrowed capital is utilized to increase the potential ROI. Also, remember that there is a loss in any loan restructuring transaction, so your plan needs to mitigate the loss to the lender while protecting your own interests in your property.
Finally, traditional brick-and-mortar stores will need to boost their online presence for sales. Spending at e-commerce stores has actually increased during the pandemic while retail sales have dropped, so this could end up becoming a major opportunity. Think about which products you offer that could be offered online through e-commerce channels, consider a business plan that relies more on delivery vans for local sales, and invest heavily in your email and social media marketing if you haven’t already.
Legacy retailers will struggle heavily with this and will likely have to rely on external partners, but ultimately all businesses will need to prepare for an online future. As 97% of all businesses were already increasing their technology investments, this was a trend already happening, but it’s been accelerated as a result of COVID.
The economic recession created by the COVID-19 pandemic has hurt the real estate industry in ways that no one could have foreseen coming. The gap in interest rates between the lenders and the government has widened substantially, and we can expect it to take years before properties can return to a state of profitability.
For now, lenders will have to continue making mortgage loans, but under much more scrutiny. For business owners, they will need to explain how their properties can be well-positioned to profit in the future if they want to secure a loan.