April 29, 2020bisnow.com
Mystery May: Landlords Armed With April Data Still Unsure What May Will Bring
Here we go again.
For all of the pain April seemed to promise, most landlords — with the exception of retail owners — were left pleasantly surprised: They recouped close to 90% of their expected rents. But as rent comes due again on Friday following the first full month of the U.S. economy’s near-complete shutdown, what May will deliver for landlords is anyone’s guess.
“No one really knows what’s going to happen in May,” said MJW Investments founder Mark Weinstein, whose company owns thousands of apartments and student housing units on the West Coast. “It’s all speculation. I don’t expect it to be as good as April. But I'm hopeful.”
The U.S. Treasury Department has distributed billions in direct stimulus payments and hundreds of billions to small businesses over the past month. Bisnow spoke to dozens of landlords across the country this week, and many were optimistic that they can bring in something close to normal revenue.
“All of our tenants, we know where they stand,” said Beck Ventures CEO Scott Beck, a Dallas-based mixed-use developer. “I believe for those landlords that have been proactive and are talking directly to their tenants, we will be in a much better place on May 1 than we were on April 1, because the uncertainty is now gone.”
Many others expect collections to drop significantly, and there is little talk of canceling rent, despite the budding nationwide tenant protests asking governments to do just that. According to a survey of 25,000 apartment renters conducted between April 10 and April 16 by property management firm Grace Hill, 69% said they had paid April’s rent in full.
As of last week, 52% said they would be able to pay full rent in May.
Retail owners are already working out months-long rent deferment plans with tenants they know can’t afford another payment on their lease. But as the crisis deepens, landlords have no choice but to be realistic and try to collect what they can, when they can.
“On the moribund side of it, does it make sense to help them anyway? It’s possible that you have a tenant whose financials weren’t strong before COVID-19 and after you’re just delaying the inevitable,” Dedeaux Properties Chief Operating Officer Alon Kraft said.
“Again, we’re all in this together and none of us want to see our buildings go dark but ... you have to be smart about how you do that, because we don’t have unlimited capacity.”
What Just Happened: The April Report Card
Eighty-nine percent of apartment households paid the rent in April, according to the National Multifamily Housing Council’s Rent Payment Tracker, which surveys 11.5 million units in the U.S.
RiseBoro, a New York City affordable housing owner and developer, experienced a drop-off of between 20% and 25% in rent payment rates in April, CEO Scott Short said. He said rent loss for affordable housing stock was typically higher than market-rate, based on conversations with other affordable housing landlords, many of whom experienced a drop-off of around 30%.
For affordable housing landlords, these losses are more severe than market-rate because they operate on slimmer margins.
“We’re reliant largely on public funding. The buildings are financed to run pretty close to break-even, so when you see the 10% loss in rental revenue, there’s not going to be enough cash to go around to pay all of your bills at the end of the month,” Short said. “We’re going to need to triage expense payments or look for [loan] forbearance or forgiveness.”
While there aren’t equally comprehensive statistics for retail, office and industrial rents, owners of the latter two asset classes told Bisnow they received between 70% and upward of 90% of rent last month, depending on the asset class and geography.
“Thank God I don’t own any retail,” said Brennan Investment Group Chairman Michael Brennan, whose Rosemont, Illinois-based firm owns a 46M SF industrial portfolio.
“We collected about 92% of the rent so far, and we expect that number will soon rise to 97%, which is almost identical to what it was pre-coronavirus,” he said. “The vast majority of our tenants have sufficient funds to carry on in turbulent times.”
For Taconic Partners, which owns residential and commercial properties in New York City, April turned out better than co-CEO Charles Bendit was expecting.
“May will be interesting,” Bendit said. “I think a lot will be told by what happens in May.”
More than 80% of the tenants in the company’s residential portfolio paid rent in April, with certain properties exceeding 90%, he said. While collections on the commercial side are not fully calculated yet, Bendit expects that they will be over 70%.
“It’s challenging, we have discussions with tenants — we were with them and not only recognize their challenges, but we are finding ways to have them keep current in their rent,” he said.
West Coast investor and developer Meridian saw a tale of two property types in its portfolio as April progressed, CEO John Pollock said. For the general Bay Area office properties that make up about a third of Meridian’s portfolio, Pollock was surprised when the company saw 100% of rent collected.
For its multi-tenant medical office buildings scattered around the West Coast, the number was significantly lower, he said, and relief requests have been increasing as May 1 approached.
“The impact on our healthcare portfolio has been more acute, as the tenants’ revenue is driven largely from patient visits, which has essentially been shut down,” Pollock said. “Where there’s demonstrable need, we are offering a short-term deferral that is paid back over 12 months or a longer-term deferral that is paid back over a shorter period.”
For Meridian, demonstrable need includes proof that tenants have applied for the federal government’s Paycheck Protection Program, for which Meridian estimates 80% of its tenants qualify. Access to the second round will be critical to many of Meridian’s tenants, especially now that six Bay Area counties have extended shelter-in-place orders through May, Pollock said.
Brennan, the industrial owner, thinks May rent collection should also go smoothly. Small businesses hurt by this spring’s economic downturn can now get forgivable loans from the federal government to pay rent and utilities, he said, which was not an option four weeks ago.
“Who doesn’t want a forgivable loan?” Brennan said. “I think if a company doesn’t have one of these loans, it’s either because they chose not to get one, or it’s because they’re doing well, or are too big.”
The Paycheck Protection Program stipulates that for the Small Business Administration to forgive a company’s emergency loan, it must spend at least 75% of it on payroll. “Our policy remains the same,” Brennan said. “We’re not a financier of our tenants’ businesses.”
The Way Forward For Retail
While most apartment, office and industrial landlords have asked tenants to prove hardship before granting rent relief requests, most retail landlords don’t need proof that their tenants are struggling.
Block Property Group’s April rent collections in multifamily, office and industrial have remained strong, with only 5% of tenants requesting rent relief, President Greg Block said. Block manages commercial properties of all kinds, and nothing he oversees is hurting like retail.
"In our management portfolio, retail rent collections are down 75%," Block said. "This drastic reduction in rent collections requires creative solutions to meet the needs of both tenants and owners."
One strategy Block has seen for May, based upon discussions with struggling tenants and their property owners, is some owners deciding to forgive as much as 50% of April and May rent in exchange for timely payment of the balance of rents due, Block said.
Satya Inc., which owns and manages 16 retail properties, as well as a few hotels, office buildings and condominiums in the greater Houston area, has only had one retail tenant file for bankruptcy since the pandemic forced businesses to close to the public, CEO Sunny Bathija said. Another tenant returned a key and told the company that it was going out of business. But for the most part, Satya’s retail tenants are holding on — for now.
Texas Gov. Greg Abbott said Monday that retailers and malls will be able to reopen at 25% occupancy on May 1. That could increase to 50% occupancy by May 18, if there is no spike in coronavirus cases.
"If the state is going to allow the retailers to open in a fierce manner, we are hoping that the bleeding will reduce from the month of June,” Bathija said. “That's our hope.”
Bathija said his company was able to collect about 35% of rent from its retail tenants in April and around 85% of common-area maintenance charges. Satya has been working with tenants to defer rent payments for April, with the expectation that many will also need a deferral for May.
The company has offered tenants the option of amortizing deferred payments into the remaining term of a lease. Tenants would only need to pay a small increase in monthly rent and can theoretically catch up without being forced to default or pay late charges, he said.
Satya is like many other retail landlords hoping that a delay and spread-out repayment plan is enough to keep their tenants afloat and lenders satisfied. Many have pegged April, May and June as an acceptable stretch to accept less in rent — as long as it’s recouped on the back end.
Beck, whose company, Beck Ventures, develops retail and entertainment-focused mixed-use projects around the Dallas-Fort Worth area, said he collected 75% of April rents and is optimistic about his and his tenants’ business moving forward.
“A month ago, there were a lot of uncertainties because the tenants didn't have their PPP money yet,” Beck said. “We chose to be very proactive as opposed to not returning phone calls or waiting to see what our tenants did. Before we even got to that date, we already started talking to them and finding out what's going on.”
Heading into May, Beck says he knows where all of his tenants stand in the short-term, and he credits PPP money for being one of the resources that allowed tenants to cover expenses. In addition to PPP funds, Beck gave a few tenants facing cash shortfalls reduced rents or rent abatements, with the caveat that their remaining balances will be paid over 12 months next year.
“If they are not going to pay rent for three months, and you take those three months divided by 12 across all 12 months of next year, that is a very palatable thing for a tenant to be able to handle in a normalized environment,” Beck said.
Kemper Development owns the Bellevue Square Mall in Bellevue, Washington, which became ground zero for the novel coronavirus in the U.S. in January. Kemper Director of Retail Alesha Shemwell sensed the retail situation would soon grow dire. After weeks of cutting mall hours, the mall closed March 17.
Six weeks later, stores around Washington state remain shuttered and rent is difficult for most tenants to pay.
“We have been in close contact with every tenant,” she said. “And for the local tenants we are able to offer a little bit more help. We are working with them for their April, May and June rents.”
The Menkiti Group has a residential portfolio totaling around 300 units and owns retail properties with around 200 tenants in the D.C. area. Founder and CEO Bo Menkiti said his company has been working with its retail tenants, mostly small businesses, to take advantage of the PPP program and other government relief options. It is also partnering with Streetlight Ventures, an organization that helps support retail businesses.
But he said his options on granting rent flexibility are limited.
“It’s really challenging, because we’re not at full liberty to just make a decision about their rent, we have loans and agreements with lenders that don’t allow us to modify leases,” Menkiti said. “We’re having to work through that.”
What Happens Next: May And Beyond
Almost unanimously, landlords told Bisnow they expect to bring in less money in May than they did in April. Many are concerned not with tenants who can’t pay, but those who can, but won’t.
“There are some people who aren’t very responsible, and they’re going to take any opportunity not to meet their obligations,” Menkiti said. “You learn a lot about people in a crisis.”
Roughly 85% of The Menkiti Group’s residential tenants paid their April rent, but Menkiti said he is expecting fewer will in May. He said he is more likely to help the tenants who show they are making an effort to pay.
“It’s hard because what you’re finding, not surprisingly, is that your most responsible tenants, the people who probably need the help, are sometimes reluctant to reach out, but they’re trying to make a go of it,” Menkiti said. “If they don’t have the money, they call and say, ‘What can I do? Can I pay part of it?’ … I’m going to go the extra mile to try to support those folks because they’re taking it responsibly.”
The Related Group’s affiliates have 13,000 residential rental units under management in major cities including Miami, Fort Lauderdale, Tampa and Atlanta. The portfolio includes all levels of housing stock, from affordable to luxury.
Steve Patterson, the president and CEO of Related Group’s development division, said the company’s market-rate units collected 95% of rents, and he attributed that number to proactive and consistent communication.
“Our own research and several industry reports show that delinquencies are primarily due to COVID-19-related job losses,” Patterson said. “However, as many as half comes from residents choosing to not pay their rent despite continuing to earn a paycheck.”
Patterson said because Related focuses so heavily on individual tenant outreach, it can pinpoint who can’t afford to pay rent, and who can, but won’t. Related found an effective tactic to fix the problem: shame.
“The teams have found that frank conversations about the importance of all individuals doing their part for the benefit of the community, and the negative impacts of missing rent, are quite effective,” he said. MJW Investments collected 90% of its rents in April, but it wasn’t easy, founder Weinstein said.
“It was a lot of work, a lot of handholding, a lot of partial payments and a lot of late payments,” he said.
Tenants who were impacted or lost their jobs were openly and voluntarily sharing their financial hardships, he said. MJW is working with them on a case-by-case basis, which includes coming up with a payment plan so they can pay back the missing rent by a certain amount of time, Weinstein said.
“The most important thing for us right now is, for the people that lost their jobs and have real issues, to be very empathetic and supportive,” he said. “They are good people. They want to pay a portion of their rent.”
However, he has also gotten “blown off” and ignored by a small number of tenants he thinks are taking advantage of the public health crisis, he said.
“Because of the mixed messages they’ve gotten from the state and federal government, they are gaming the system,” Weinstein said. “They have a job. They can afford the rent, but because they know we can’t evict them right now, they are not going to pay.”
Weinstein said there are serious repercussions for tenants for not paying rent, including a black mark on their credit. He likes to say that everyone is part of a financial ecosystem: Renters pay rent, which allows a landlord to pay staff and maintenance workers, the mortgage, investors and property tax. The money for property tax then goes to pay for essential services such as firefighters and police officers.
“Everyone has to work together,” he said. “For people who can afford to pay rent, not paying rent is hurting a lot of people.”
Atlanta-based Ackerman & Co., which owns and operates more than 37M SF of office, medical, retail, industrial and mixed-use space across the Southeast, collected between 50% and 80% of rents in April, depending on the property type, Ackerman Retail President Leo Wiener said.
He doesn’t expect May rent collections to be marginally different than they were this month. The real test for rents, Wiener said, will be in July and August.
“It's going to be a long process,” he said. “We're not flipping on the switch where everything's open.”
Institute of Real Estate Managers 2020 President-elect Chip Watts, the president and head of property management at Birmingham, Alabama-based Watts Realty, said May might be more painful than April for landlords, but June is where distress could sink in more deeply.
“With the PPP loan program covering only eight weeks of payroll, rent and utilities, we are not too worried about May rents. However, we are worried about June rents,” Watts said.
“Should the shelter-in-place or stay-at-home orders stay in place for much longer, we are concerned that our retailers — especially our food-service providers — will find it very difficult to remain in business, much less pay rent.”