Stuck in the Middle

Published July, 14, 2020

Holly Gardner, President

As with all actions, they create a reaction. That is proven in science and true in life. Often it’s more than one, and that chain of reactions can be difficult to fully understand or grasp at the time of the decision. This is how I can best describe the current political and economic decisions being made right now. Actions and reactions. Everyone is doing the best they can, but it seems like we’re constantly chasing the solution for the latest reaction. Maybe that’s all we can do.

For commercial real estate, we sit solidly in the middle of one of those chain of reactions, and we are feeling the pinch from both ends at the moment. We are just one of the gaps in the economic relief plan.

The government is working hard to get relief into the hands of workers and families that need it. That’s incredibly important, even if not fully sufficient. Those individuals then prioritize how they use their limited resources. Food and shelter are always at the top of that list. That is a basic human survival instinct. This means that the personal economic relief measures that were rolled out are helping to ensure that families can make their residential payments and maintain shelter during this crisis. We’re seeing that with quite remarkable collection rates both locally and nationally for rental housing, all things considered. As of June, we’re only seeing approximately an 3-4% change in collection rates from the same time last year across the nation.

On the commercial side however, our collection rates are MUCH lower, sometimes closer to 50%. Small businesses are almost unanimously unable to pay rent. Large corporations are taking national stances of nonpayment on their rent as they hustle to shore up their own walls. The commercial landlord is facing drastic losses in income. But there is no relief. There is no forgiveness of expenses or obligations. There have been some minor efforts such as short term relief of utility payments, but the reality is that the deferral offered on that is less than 60 days and is due in full within 90 days of it’s expiration in most cases. This is similar to the deferred tax payment plans that are being offered. Accrual of short term debt obligations is not relief. It’s practically useless when payment in full is expected in such a short time frame following the deferral.

Despite all of this, I hear a repeated chain of discussion amongst the public and government – Landlords should be forgiving rent obligations right now. I’m going to take a deep breath and calmly ask, “Why?” Why is this belief held? Are mortgage companies forgiving mortgages right now? Is the bank forgiving car or home equity loans? Is the government asking them to? No. That’s seen as a contractual obligation you created that is due and payable no matter what. Deferral is seen as a reasonable solution, but forgiveness is crazy! So why is our contractual agreement with a tenant for payment of their leasehold interest in a property different?

Landlord relief is an absolutely necessary component of this crisis. The chain reaction of commercial real estate failure will douse any lingering hopes of a quick economic recovery from this forced shut down. Real estate failure affects businesses, individuals, financial institutions, architects, contractors, subcontractors, vendors, property managers, excise tax economies, international investment…..this list goes on and on. Strategic and targeted relief to stave off any massive failures is our only hope of minimizing the destructive chain reaction effects to the overall economy. However, it does not appear that will be coming anytime soon. As an industry we need to rally behind one another and educate the government on the needs of the commercial real estate sector. We cannot afford to stick our heads in the sand and hope we survive. We need to plan. We need to advocate. We need to innovate. Let’s put our collective experience and knowledge together and find a reasonable and fair solution that promotes survival, and one day, prosperity.

What are your thoughts? What are you doing to help address this in your own business, city, and state?

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