As we wait for more concrete data for the full month of April, I am going to share what pieces of information you should know and what you should be watching out for during the Coronavirus pandemic.
I also am going to share what I am hearing “in the streets,” from clients, and from my personal portfolio. These rumors and real-time feedback can help prepare you for the coming data ahead of time.
You need to depend on the data but speaking to owners, renters, etc. will give you an idea of what is coming and how to prepare.
Important News This Week
Below is important news you should know this week.
- Another 5.25 million jobless claims came through last week for a total of just over 22 million over the past few weeks. These losses nearly wiped out all of the job gains since the Great Recession, per CNBC. As of now, we are likely around 15% unemployment.
- Homebuilder confidence index fell in its biggest one-month drop ever.
- Housing starts dropped 22.3% from the month prior. It was the worst monthly decline since the 1980s.
Why should we be following data like the ones above?
Well, there are keys pieces of information that we can apply to our local markets.
With more people out of work, the more home-buying demand can potentially slow. It is not a perfect comparison due to the South Bay being a wealthy demographic compared to the rest of the country, but it has its effects.
Additionally, unemployment will hurt landowners in all types of real estate and they will see their cash flow decrease which may have the wealthier buyers wary to spend money on new housing.
Homebuilder confidence is interesting because they are on the front lines of real estate on a larger scale. If you go deeper into details of the survey, it looks like buyer traffic decreased by almost 70%.
Lastly, housing starts are a key indicator on confidence in the market and construction employment. Contractors tend to have jobs booked out months in advance. If new builds are stopped or delayed, this is a lagging part of the economy’s workforce that could be laid-off in a few months as construction work slows.
I will try to report on certain important data each week or two.
There was a report from the National Multifamily Housing Council stating that almost a third of U.S. renters did not pay.
This was a title that was a bit misleading to get reads and clicks and I know most clients did not dive into the details when sending me various articles.
To be clear, the report was just for rent collected between April 1 and April 5 of 2020. Of the 13 million units surveyed, 69% paid their rent which doesn’t sound good but in April of 2019, only 82% of renters paid between that time period.
So, that is a 16% drop compared to last year. Not terrible.
From my experience, there are a lot of renters that pay regularly in the middle of the month.
Our local portfolio in Greater Los Angeles saw zero paperwork submitted proving that someone was affected by COVID-19 and needed a break. Of performing units (not in evection pre-coronavirus), we saw 12% of rents not received thus far. Those tenants were in communication and planned to pay.
Many of the landlords we have been speaking with locally have felt similar effects, and some even better.
Now we are residential focused here, but I would be remiss without mentioning office and retail.
According to some clients and sources locally, office property has been holding up well. In a growing economy, office rents would come in like clockwork. But now, office landlords are extremely nervous about their rents coming in as the pandemic persists.
This is all hearsay, but I have heard office rents collected were around 85% when trying to look across the board.
Retail, however, is a far different story.
It is UGLY out there. Most retail landlords are bracing for just a small fraction of rent to come in.
Outside of performing grocers and a few essential services, most rents are not coming in at all. And, as other retail tenants start to read that most tenants are not paying, then they will jump in too.
My gut tells me that retail will receive 25% or less of rent from what I am hearing. Some are already receiving 0% of rents.
Eviction moratoriums will likely hit landlords the most as tenants use the new laws to manage cash flow issues.
It has been well-publicized that residential renters have been given a grace period through May 31st, 2020 if they are affected by COVID-19.
What has been less publicized is that California courts via the state’s judicial council issued emergency orders to stop all hearings on evictions and foreclosures for 90 days AFTER the California state of emergency order is lifted.
So, even if a tenant is making more money than ever and can afford rent, but chooses not to pay, a landlord has a long time to wait until they can file an eviction.
Commercial evictions are not without new laws as well. The city of Los Angeles and county of Los Angeles has put a freeze on commercial evictions as well if you can prove your business has been affected (…who hasn’t been affected?!).
If you think this is limited to just progressive cities and unincorporated counties, you are wrong.
The city of Hermosa Beach has put a moratorium on commercial evictions as well. It does not relieve the tenant of the liability to pay rent, but evictions cannot be commenced under many circumstances.
It will be wild to see how these play out and affect the real estate market in the coming weeks and months.
I will likely do a deeper dive into eviction moratoriums and rent payments down the road. And, I’ll share how our company approaches these new laws as a landlord and commercial tenant ourselves.
Where to Look for Deals
So with all this, where should one look for deals?
As I have said over and over and over again, it is far too early to start seeing deals. Real estate moves very slowly, although markets should move faster than the Great Recession this time around due to the speed and significance of the pandemic.
One thing to note is the lack of rent coming in and the eviction moratoriums…and how long it will all take.
Lawyers I have spoken with say to get ready for at least six months for an eviction case to be heard and potentially as far out as 12 months. There will be a mass rush of cases and the courts will be overwhelmed in a way that we have never seen before. Good luck.
What commercial real estate will be affected most?
Well, here is my list, excluding industrial…
Retail is going to get absolutely crushed over the next three to nine months. That’s obvious, right?
Office will not be hit as hard, but will begin to feel effects in a lagging way over a couple of months if the economy continues to deteriorate.
Multifamily will be the strongest as people will want to keep a roof over their head. Even if we go to say, 20% unemployment (with improved UI benefits), multifamily is pulling in far better rents than zero percent of rents coming in for retail.
While most clients are calling saying they want to buy distressed apartments, they are going to have to wait the longest for that to shake out. You will only see apartment deals in over-leveraged recent purchases and apartment flippers getting caught in the wrong place at the wrong time.
We will begin to see the deals in retail sooner rather than later, especially small mom and pop retail properties and small mixed-use that will have trouble getting financing. Most individuals simply cannot withstand no rent for a year and the pending legal battles to try and recuperate lost funds.
This is all a guess, but I feel like it is somewhat educated guess if you have been following me for a while. As more data comes, the clearer the picture will become. And you know I will try to write it up for you.
Start doing your homework on retail first if you have dry powder, then office, and then multifamily later down the road.
Patience is still a virtue as the potential huge pain is not here yet. This is just the first month of missed payments!
We have a long way to go…